Wonkbook: There Europe goes again

September 27, 2012

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Wonkbook dashboard

RCP Obama vs. RomneyObama +4.0%; 7-day change: Obama +1.0%.

RCP Obama approval49.9%; 7-day change: +0.6.

Intrade percent chance of Obama win74.8%; 7-day change: +7.6%.

Top story: The bearish case for the economy

Europe's problems seem to be creeping back. "Just a few days ago, Europe’s long-simmering financial crisis seemed to have reached a resolution, following demonstrations of resolve by all players involved to deploy whatever means necessary to heal the deep fissures among the 17 nations using the euro. Never mind. European stock markets tumbled Wednesday amid unrest on the streets of Madrid and Athens and new doubts about the path forward for the continent." Neil Irwin in The Washington Post.

The pain in Spain, in particular, is getting bad again. "Spain's borrowing costs rose and its stock market fell sharply on the eve of Madrid's announcement of new austerity measures, putting the shaky economy again at the center of Europe's race to preserve its currency union...The government's 10-year borrowing costs rose nearly one-third of a percentage point, to above 6%, placing renewed pressure on Madrid to find a way out of its debt crisis and appearing to crimp its prospects for avoiding a bailout from its euro-zone partners." Stephen Fidler and Jonathan House in The Wall Street Journal.

The Catalonia region is threatening secession. "At present this appears unlikely. But pro-independence pressures are developing rapidly in Catalonia, the most powerful of Spain’s 17 autonomous regions. It is the most serious test of the decentralised Spanish system of government since the nation returned to democracy in the late 1970s after Franco’s dictatorship." Tony Barber in The Financial Times.

@ObsoleteDogma: BREAKING: Everybody wants everybody else to take the losses in Europe.

Wasn’t Europe supposed to have fixed itself? "The short answer is that nothing really has happened. Europe’s problems were lurking there all along. They just got papered over temporarily. In late August, European leaders, in conjunction with Mario Draghi of the European Central Bank, announced a grand plan to bring government borrowing costs for countries like Spain and Italy down to manageable levels. That quelled the immediate financial panic. But it didn’t solve any of the deeper structural problems within the euro zone." Brad Plumer in The Washington Post.

You might notice a pattern in Europe. "Step 1: News of political turmoil in ailing European Country X raises questions about their dedication to austerity. This is often be accompanied by missing deficit targets, riots and/or burgeoning political change. Step 2: The bond market freaks out, which raises borrowing costs for European Country X. Wonks, politicians and pundits quickly chime in. Step 3: The can is thoroughly kicked down the road. Concessions are made for Country X, negotiations are held, quotes are given/intentions leaked. Step 4: After some period of time, the crisis appears again." Ryan McCarthy in Reuters.

This keeps happening because the European Central Bank wants it to keep happening. "The politics of the thing essentially prevent a 'once and for all' resolution from taking place. That's because the [European Central Bank's] game is to centralize as much authority in Frankfurt as possible which means that peripheral governments must be continually put to squeeze between the demands of the central bank and the demands of the voters. The fear is that if the ECB goes "too easy" on the Spanish government, that Rajoy will give in to the political unpopularity of the ECB agenda and back off. Spain needs to be perched perennially on the brink of a crisis since its citizens can't be trusted to Ireland/Baltic-style simply go along with austerity budgeting." Matthew Yglesias in Slate.

@fivethirtyeight: Hidden positive for Romney: stock market off a bunch on renewed investor concerns about Europe. Can't rule out October surprise.

Meanwhile, in the U.S., the fiscal cliff is souring business confidence. "Confidence among US chief executives has plunged to its lowest in three years, according to the Business Roundtable, as a result of fears of steep tax rises and government spending cuts scheduled to take effect next year. The survey is the strongest sign yet that the looming 'fiscal cliff,' created by the failure of Congress to agree new tax rates or a long-term budget deal, is hurting companies’ ability to plan and make investment decisions." James Politi and Ed Crooks in The Financial Times.

@jimtankersley: I wonder if the CEO-consumer divergence is related to awareness/fear of fiscal cliff. Other ideas?

And, after months of good news in housing, a 'meh' in August. "Sales of new homes dipped slightly in August from July, but the median price of homes sold during the month rose by a record amount. New-home sales edged down to a seasonally adjusted annual rate of 373,000 in August, a dip of 0.3 percent from July’s revised rate of 374,000, the Commerce Department said Wednesday...The median price of a new home jumped 11.2 percent in August to $256,900, the biggest one-month gain on record." The New York Times

@Neil_Irwin: Hooray, decoupling? Euro Stoxx index down 2.47%, S&P 500 off only 0.43%.

WESSEL: Are we going off the fiscal cliff? "Is Congress going to drive the U.S. economy over the fiscal cliff? Is Washington so dysfunctional that Congress and the president, risking renewed recession, will let taxes rise sharply and spending be cut across the board? Maybe...With three months to go, Congress has left town until after the Nov. 6 elections with no apparent progress toward a compromise...On Wall Street, the betting is that Congress will find some way out after the election -- either making a deficit deal (substantial or gimmick-ridden) or calling the whole thing off." David Wessel in The Wall Street Journal.

@TheStalwart: The fact of the matter is that nobody in the financial world cares about the fiscal cliff. All a politics/media phenomenon.

Top op-eds

KLEIN: Undecided voters won't be deciding this election. T"he undecided voters in those states are popularly portrayed as people who just can’t make up their minds. But that’s not quite right. They aren’t so much 'undecided' as uninterested and, frankly, uninformed..It’s worth stopping here to clarify something: 'uninformed' does not mean 'dumb.' We’re all uninformed about certain topics...There’s little reason to believe that undecided voters in this campaign will break sharply toward one candidate. The votes of the undecideds seem to be roughly evenly split, and if any big news happens between now and the election, they’re likely to be the last to know about it, and the least interested in following up on it. If Obama is going to turn this into a rout, or if Romney is to salvage a win, it will probably require changing minds that are already made up, or increasing (or suppressing) turnout among base voters." Ezra Klein in Bloomberg.

SOROS AND ABED: How rule of law can end poverty. "Events in Tahrir Square and beyond have sparked optimism about a global democratic resurgence. But at the same time, there is fear of instability and lawlessness. Let us not forget that in 2015, 1bn people will still be living in extreme poverty. A hard road still lies ahead. Strengthening the rule of law is more important than ever. A legally empowered citizenry is both the guarantor and lifeblood of democracy. Poverty will only be defeated when the law works for everyone." George Soros and Fazle Hasan Abed in The Financial Times.

SUNSTEIN: The lessons of sugar man. "We like to think that intrinsic quality produces success, and that in free markets, quality will ultimately prevail. To be sure, quality is usually necessary, but it’s not enough. Social dynamics -- who is conveying enthusiasm to whom, and how loudly, and where, and exactly when -- can separate the rock icon from the demolition man, and mark the line between stunning success and crashing failure. An understanding of those dynamics tells us a lot about the role of serendipity in cultural markets, business, politics and other domains -- and about why success and failure can be impossible to predict." Cass Sunstein in Bloomberg View.

ROBERTS: The power of 'social-enterprise partnerships.' "Across our country, social enterprise partnerships between the public and private sectors are providing millions of Americans -- young and old -- a second chance. Just as education reform has proven that economic circumstances do not determine a child's ability to learn, social enterprises are proving that prison time, drug addiction, homelessness and mental illness can be overcome with opportunity and hope. Social-enterprise employees earn wages and pay taxes, reducing their recidivism rates and dependence on government assistance. They also receive crucial on-the-job training, job-readiness skills, literacy instruction and, if necessary, the counseling and mental-health services they need to move into the mainstream workforce. A 2012 evaluation of the Center for Employment Opportunities in New York, a social enterprise employing ex-prisoners found that every $1 spent on the Center resulted in almost $4 of savings through reductions in recidivism and increased employment." George R. Roberts in The Wall Street Journal.

SMITH: The way to privatize Amtrak. "It is an election year, so Republicans are once again calling to privatize Amtrak...If these plans sound familiar, it is because President George W. Bush tried to do the same thing. Yet Amtrak remains a ward of the federal government, and Republicans are largely to blame. If they are serious, they will learn from their earlier failure...Instead of aggressively pursuing reform within Amtrak, the Bush administration came out with a much more ambitious proposal: no more federal subsidies...The Republicans’ ideas about private rail have merit, but if they want them to succeed, they will have to be patient. They will need Democratic support." Stephen Smith in Bloomberg.

BARRO: Romney's tax plan is 'not intended as a factual statement.' "Romney can’t have a plan to raise taxes on the middle class because he doesn’t really have a tax plan at all. Or rather, Romney has laid out a tax 'plan' whose parameters cannot all coexist...Instead, we should conclude that Romney’s tax intentions are simply unspecified. Perhaps he will raise taxes on the middle class, perhaps he won’t cut rates as much as he’s proposed, perhaps he will ditch revenue neutrality...My best guess is that Romney’s tax policy, if he were elected, would bear little resemblance to his plan for a 20 percent rate cut. Before announcing his current tax plan in February, I think Romney had the tax plan he really wanted: Cut corporate taxes, do a small tax cut on capital gains aimed at the middle class, and then make some noises about the need for base-broadening tax reform down the road." Josh Barro in Bloomberg.

Clichés interlude: 'There are two kinds of people in this world...'.

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

Still to come:how to cut corporate tax rates; a ban on lobbyist participation; why drilling in the Arctic is just really difficult; and follow the money.

Economy

Under Obama, manufacturing is (sort of) looking up. "Manufacturing has been in freefall for more than a decade, but the trend seems to have been reversed during the Obama administration, according to a new analysis by Bloomberg Government: 'The BGOV Barometer shows U.S. factory positions have grown since early 2010, arresting a slide that began toward the end of the 1990s. It’s the best showing since the era of Bill Clinton.'" Suzy Khimm in The Washington Post.

How to cut corporate taxes. "Everyone wants to cut the corporate income tax rate. That’s one of the few areas of real common ground in American tax policy. Obama wants a flat rate of 28 percent, down from the current 35 percent top rate. Romney wants to push it even lower, to 25 percent, as does House Ways and Means chair David Camp. All three major bipartisan tax reform plans -- Bowles-Simpson, Domenici-Rivlin and Wyden-Coats -- include a corporate rate cut, to 28 percent, 27 percent, and 24 percent respectively. And all of these plans would pay for the cuts by closing loopholes...[Y]ou can reduce the rate almost 10 percentage points — to 25.1 percent — by eliminating deductions...The easiest deductions to cut are the ones that target specific industries...Unsurprisingly, you need to touch more popular tax breaks to afford real rate reduction. The biggest is a provision called 'accelerated depreciation.'" Dylan Matthews in The Washington Post.

Wonkblog explains: how the rest of the world taxes.

Abroad, new limits on high-speed trading. "After years of emulating the flashy United States stock markets, countries around the globe are now using America as a model for what they don’t want to look like. Industry leaders and regulators in several countries including Canada, Australia and Germany have adopted or proposed limits on high-speed trading and other technological developments that have come to define United States markets. The flurry of international activity is particularly striking because regulators have been slow to act in the United States...In contrast, the German government on Wednesday advanced legislation that would, among other things, force high-speed trading firms to register with the government and limit their ability to rapidly place and cancel orders...The broadest and fastest changes have come out of Canada, where this spring regulators began increasing the fees charged to firms that flood the market with orders." Nathaniel Popper in The New York Times.

Follow the money interlude: Campaign donations number, size, and source for Obama and Romney.

Health Care

Big companies changing approach to health insurance. "Two big employers are planning a radical change in the way they provide health benefits to their workers, giving employees a fixed sum of money and allowing them to choose their medical coverage and insurer from an online marketplace...The approach will be closely watched by firms around the U.S. If it eventually takes hold widely, it might parallel the transition from company-provided pensions to 401(k) retirement-savings plans controlled by workers and funded partly by employer contributions. For employees, the concern will be that they could end up more directly exposed to the upward march of health costs." Anna Wilde Matthews in The Wall Street Journal.

The Postal Service is near a second default on its health-benefits fund. "If it’s September, it must be time for the next installment in the wail of woe from the U.S. Postal Service. Given the regularity with which USPS bemoans its desperate financial condition, Postmaster General Patrick R. Donahoe runs the risk of being considered the boy who cried wolf. That would be a mistake. Because we continue to get mail delivered daily, it’s easy to discount the Postal Service’s continuing pleas for relief. But the wails and the woe are real. So is the wolf. In this case, the wolf is a financial crisis that has been real for years. Now it prevents the Postal Service from making a $5.6 billion payment to pre-fund retiree health benefits due Sept. 30. It was the same story last month when the agency defaulted on the Aug. 1 payment." Joe Davidson in The Washington Post.

Domestic Policy

Obama ban on lobbyist activity stands muster before judge. "A federal judge Wednesday upheld an Obama administration ban on lobbyists serving on advisory panels, throwing out a lawsuit brought by six lobbyists who hoped to serve on such boards and committees. U.S. District Judge Amy Berman Jackson ruled in a 31-page opinion that the lobbyists had failed to make their case that the policy violated their constitutional rights by denying them 'a valuable government benefit' because they had petitioned the government, a protected activity under the First Amendment." Del Quentin Wilber in The Washington Post.

How many get government benefits? "Last week, we examined Mitt Romney’s contention that 47 percent of the country was 'dependent on government.' A look at Census data suggests that, yes, about 49 percent of Americans lived in a household last year that received at least one direct benefit from the federal government, be it Social Security or food stamps or unemployment insurance...If you include all federal benefits that go to specific households, from Social Security to even tax expenditures like the mortgage-interest deduction, then survey data from 2008 reveals that 96 percent of Americans have received assistance from the federal government at some point in their life...Of course, you could also broaden the definition of “government benefit” much, much further to include everything from highways to farm subsidies (which provide us with cheaper food) to food-safety regulations to government-granted patents (which, in theory, promote innovation and benefit patent-holders)...[T]he number of people who receives government benefits varies quite drastically depending on whether or not we include tax expenditures." Brad Plumer in The Washington Post.

Tech interlude: The Wall Street Journal ranks the top 50 startups.

Energy

Arctic drilling is getting tougher. "As the world warms, the sea ice in the Arctic has been melting faster and faster with each passing year. Energy companies, in turn, have rushed in to exploit the newly uncovered oil and gas resources in the polar regions. But these Arctic prospectors are finding that drilling can be tough going -- in part because they face growing opposition." Brad Plumer in The Washington Post.

A milestone is passed in wind power. "The EU has cemented its title as the world champion of wind power by passing the milestone of 100 gigawatts of generating capacity installed. The turbines bestriding the continent’s plains and seas can now pump out as much electricity as 39 nuclear power plants – or enough for 57m households. The new record, announced by the European Wind Energy Association trade body, underlines how quickly wind power has grown in the EU, despite the eurozone crisis and concern about the cost of wind subsidies and turbine-blighted views. It took almost 20 years to get the first 10GW of wind power connected to the grid in Europe, the EWEA said, but only 13 years to add 90GW. Half the 100GW was installed over the past six years, in line with EU targets to tackle climate change by getting a fifth of the bloc’s energy from renewable sources, such as wind and solar farms, by 2020." Pilita Clark in The Financial Times.

GE building greener electricity generators. "[T]he idea of what constitutes a good generator is shifting. General Electric announced a line of new models on Wednesday, with two interesting environmental twists. One is efficiency. New natural gas plants burn the fuel in something that resembles a jet engine that is chained to the ground and turning a generator. Over the years, as the technology of such models has improved, they have been converted a given quantity of gas to larger and larger amounts of electricity...G.E. has introduced a product line called FlexEfficiency that allows operators to adjust quickly as renewable energy comes on on and off the grid, including a 750-megawatt combined-cycle plant that can vary its output by 100 megawatts in one minute. " Matthew L. Wald in The New York Times.

A carbon tax could halve the deficit. "Taxing carbon emissions could raise enough money to eventually cut the deficit in half...But the Congressional Research Service overview nonetheless arrives at a time of renewed interest in the idea from some policy wonks, Democrats, and former GOP lawmakers. The report finds that imposing an escalating fee that starts at $20 per metric ton could reduce the projected 10-year budget deficit by more than 50 percent, from $2.3 trillion to $1.1 trillion...The report, relying on CBO analysis of carbon costs under a hypothetical cap-and-trade program, estimates that the escalating $20-per-ton tax could raise $88 billion in 2012, rising to $154 billion in 2021." Ben Geman in The Hill.

Wonkbook is produced with help from Michelle Williams.

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Suzy Khimm · September 26, 2012