Wonkbook: Monetary policy’s moment

December 13, 2012

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Wonkbook's Number of the Day: 6.5 percent and 2.5 percent. Those are the Fed's newest thresholds for the unemployment rate and the inflation rate before the Fed will tighten monetary policy by increasing interest rates, according to the Fed's latest statement. The numerical thresholds are new to Fed policy, representing a landmark innovation in monetary policy as well as a decisive move to preserve monetary accommodation. For more, see Wonkbook's top story today.

Wonkblog's Graph of the Day: How the Fed became more dovish.

Today in Wonkbook: monetary policy's moment; the fiscal cliff; right-to-work in Michigan; the economy; and medical care, here and there.

Top story: Monetary policy's moment

Fed ties stimulus to jobs, inflation in unprecedented steps to bolster economy. "The Federal Reserve will take steps to bolster the economy until the unemployment rate falls to 6.5 percent or inflation looks likely to exceed 2.5 percent, the central bank said Wednesday in a historic move that for the first time specifies the Fed’s goals for the nation’s economy. The Fed also said it would buy $45 billion in Treasury bonds a month, on top of $40 billon a month it is already buying in mortgage bonds, in an effort to flood markets with money and reduce interest rates on a wide range of loans." Zachary A. Goldfarb in The Washington Post.

Read: The Fed's Dec. 12 monetary policy statement.

Read: The Fed's economic projections.

Watch: Chairman Ben Bernanke's press conference.

@Goldfarb: Bernanke: Economic targets are "guideposts" for when tightening could begin.

A leading monetary economist, Michael Woodford, on the Fed's policy change. "'Today’s statement provides important additional clarification of the conditions under which it will be appropriate to begin raising short-term interest rates, relative to the FOMC’s statements in September and October. Such clarification is particularly likely to help stimulate the economy when, as in this case, it indicates that the conditions required for policy tightening will not be reached as early as some might have expected on the basis of past Fed behavior.'" Zachary A. Goldfarb in The Washington Post.

@BCAppelbaum: Bernanke says the new asset purchases do not represent a significant increase in the Fed's efforts to stimulate the economy.

By the way, Bernanke said monetary policy can't offset a fiscal cliff. "The problem is that fiscal tightening is now a much bigger potential negative for the economy than monetary easing is a positive...It’s no wonder that Ben S. Bernanke, the Fed chairman, has urged Congress to engage in more stimulus. More recently, he pleaded with them to at least not engage in the anti-stimulus that austerity measures amount to. The Fed has been going into overdrive, but even the most aggressive monetary policies are unlikely to reverse the output damage that severe fiscal tightening is expected to cause." Catherine Rampell in The New York Times.

@Goldfarb: This action is probably more stimulative than Bernanke wants to admit. He likes each action to seem incremental, even when not.

IRWIN: Why this is huge news from the Fed. "This is a big deal. The Federal Open Market Committee has abandoned its practice of talking about its future policy in terms of the calendar, such as pledging low rates until 2014, and instead making clearer 1) That the path of monetary policy will depend on the economy, not some arbitrary date, and 2) What exact economic conditions it would need to see to change course." Neil Irwin in The Washington Post.

IRWIN: Bernanke 'has not yet begun to fight.' "After all, for five years running, the Fed under Chairman Ben S. Bernanke has had a remarkable track record of moving creatively, aggressively, and quickly to try to ease policy and get the U.S. economy on track -- usually more creatively, more aggressively, and more quickly than those who spend their days watching the Fed thought possible." Neil Irwin in The Washington Post.

@ezraklein: Bernanke: "I don't buy the idea that a short descent off the fiscal cliff would not be costly. I think it would be costly."

IP: The mandate is willing. But the tools are weak. "If threshholds were simply another way to express the liftoff date for the Fed funds rate, it really wouldn't be a big deal. But set against several steps taken earlier this year, it's actually a fundamental repositioning of how the Fed operates...What all these steps do is attempt to harness the public's expecations to leverage the stimulative effect of monetary policy. If investors believe the Fed will tolerate inflation above target, they will drive long-term interest rates lower even in the face of inflatationary pressure. If the public believes the Fed is serious about unemployment, they will spend and invest more, helping to bring lower unemployment about." Greg Ip in The Economist.

Twitterverse interlude: The political year on Twitter, by the numbers.

Top op-eds

HIRSCH: Why reading matters on inequality. "For all the talk about income inequality in the United States, there is too little recognition of education's role in the problem…All verbal tests are, at bottom, vocabulary tests. To predict competence most accurately, the U.S. military's Armed Forces Qualification Test gives twice as much weight to verbal scores as to math scores, and researchers such as Christopher Winship and Anders D. Korneman have shown that these verbally weighted scores are good predictors of income level. Math is an important index to general competence, but on average words are twice as important." E.D. Hirsch, Jr. in The Wall Street Journal.

FLAVELLE: Cut health care costs buy cutting doctor compensation. "As Democrats and Republicans argue about how to spread the pain of health-care spending cuts, one group has been curiously excluded from the discussion: doctors. There’s good reason to change that…It’s worth asking whether doctors, who account for almost one-fifth of health spending, really need the special treatment. After practicing for six years, the average U.S. family- medicine doctor makes $200,000; the average general surgeon, $350,000; and the average urologist, $400,000. (Spinal surgeons make $625,000.) Office- and clinic-based doctors are the most likely of any job category -- except for securities and investment lawyers -- to be in the top 1 percent of earners." Christopher Flavelle in Bloomberg.

DIONNE: Which path for the right? "In the weeks since the election, my hopes have been buttressed by conservatives willing to say that, since Republican candidates have lost the popular vote in five of the last six presidential elections, new thinking might be in order. Democrats went through the same dismal cycle between 1968 and 1988, producing a reformation on the center-left. Conservatives are surely capable of the same...Now, finally, conservatives are responding to liberal insights -- about rising inequality, about government’s proper role in the economy, about the utility of public action to promote social mobility. This is a promising sign." E.J. Dionne in The Washington Post.

CRANE AND KENNEDY: A solar panel on top of every home. "Solar photovoltaic technology can significantly reduce our reliance on fossil fuels and our dependence on the grid. Electricity-producing photovoltaic panels installed on houses, on the roofs of warehouses and big box stores and over parking lots can be wired so that they deliver power when the grid fails. Solar panels have dropped in price by 80 percent in the past five years and can provide electricity at a cost that is at or below the current retail cost of grid power in 20 states, including many of the Northeast states." David Crane and Robert F. Kennedy, Jr. in The New York Times.

Music recommendations interlude: Ravi Shankar, 1920-2012.

The fiscal cliff

‘Fiscal cliff’ talks show no progress; hope dims for a deal before Christmas. "Washington stumbled closer to the 'fiscal cliff' Wednesday as President Obama and congressional Republicans dug in further on their positions on taxes, even as no face-to-face negotiations took place. With hope fading for a deal before Christmas, House Speaker John A. Boehner (Ohio) told his Republican colleagues to prepare for a holiday season of tense negotiations in Washington. Democrats accused Republicans on Wednesday of seeking a permanent extension of expiring tax breaks for the wealthiest 2 percent of taxpayers, something the president has refused to accept; he won reelection after campaigning to end those tax cuts." Paul Kane and Lori Montgomery in The Washington Post.

What are the biggest tax deductions and exemptions? And whom do they benefit? "The number of tax deductions -- or tax breaks -- has nearly doubled since the last significant overhaul of the tax code nearly a quarter century ago, thanks to a host of tax benefits added in the years since for children, college tuition, retirement savings, job hiring and the families of victims of terrorist attacks, among others. As the number of tax breaks has increased, so has the value of some of the most popular deductions, including those for mortgage interest and the tax-free treatment of health-insurance premiums paid by employers." Ed O'Keefe in The Washington Post.

Watch: Reuters' Felix Salmon plays with Legos, Monopoly money, and stuffed animals as he tries to explain the fiscal cliff.

Spending-cut proposals on fiscal cliff get Democratic criticism. "One big question in Washington's budget talks is whether Republicans will make more concessions on taxes. This week, the counterpoint has started to come into play: What will Democrats swallow on spending cuts? The prospect of cuts to Medicare and other entitlement programs is making many Democrats anxious. Of particular concern is Republicans' call for increasing the eligibility age for Medicare from 65 to 67, an idea that could split Democrats." Janet Hook and Carol E. Lee in The Wall Street Journal.

Poll: People want a deal now. "About two-thirds of Americans of all political stripes would like Congress to strike a deal to reduce the federal budget deficit, even if means cutting Social Security and Medicare and boosting some tax rates, the survey released Wednesday found. An even larger share -- more than three-quarters of Americans, including 61% of Republicans -- said they would accept raising taxes on the wealthy in order to avoid a 'fiscal cliff' of large spending cuts and tax increases now set to take place in January." Neil King Jr. in The Wall Street Journal.

Cutting waste can't balance the budget. "All of which is to say that there just isn’t much savings to be found in pure waste. Almost all spending serves a political popular end, and what waste there is could cost more to ferret out than it takes out of the budget. There just aren’t any freebies when it comes to cutting spending, and certainly not $18 billion of them." Dylan Matthews in The Washington Post.

Boehner is struggling to contain far-right defectors. "Speaker John A. Boehner moved Wednesday to maintain Republican unity on deficit reduction talks as lawmakers on the far right openly chafed at his leadership and some pragmatists pressed for quick accommodation on tax rate increases on the rich...[T]he House’s most conservative members vowed to vote against any deal that raises taxes, openly challenging the speaker’s authority." Jonathan Weisman in The New York Times.

The corporate tax proposals. "The administration’s February plan proposed to reduce the corporate tax rate from 35 percent to 28 percent, eliminate specific corporate loopholes and deductions, and create a new 'global minimum tax' to keep multinationals from shifting profits abroad. House Republicans, for their part, have similarly proposed lowering the corporate rate, which they want to reduce to 25 percent. By contrast, they want to eliminate taxes on foreign income altogether, transitioning to what’s known as a territorial tax system." Suzy Khimm in The Washington Post.

But cutting corporate taxes pits big firms against small firms. "The Obama administration's offer to revamp the corporate-tax code as part of the 'fiscal cliff' budget talks raises the prospect that tax rates for large and small companies could diverge significantly. If ideas proposed by the White House take hold -- a long shot -- rates for big companies likely would fall next year while those paid by many small-business owners through the individual tax system would rise." John D. McKinnon and Siobhan Hughes in The Wall Street Journal.

How Medicaid dodged the fiscal-cliff debate. "On Monday, the Obama administration quietly reversed its support for a policy that would cut billions in Medicaid funding. For health care advocates, the small move reaffirmed a big message already delivered by White House staff: Medicaid is largely off the table in deficit reduction negotiations. Medicaid’s $389 billion budget has found protection in an unlikely place: The Supreme Court ruling in June." Sarah Kliff in The Washington Post.

...And what about the estate tax? "Billionaire investors Warren Buffett and George Soros are calling on Congress to increase the estate tax as lawmakers near a decision on tax policies that expire Dec. 31. In a joint statement today, Buffett, Soros and more than 20 other wealthy individuals asked Congress to lower the estate tax’s per-person exemption to $2 million from $5.12 million and raise the top rate to more than 45 percent from 35 percent." Richard Rubin in Bloomberg.

What businesses want in a deal. "Small business owners and their lobbying groups have sent letter after letter to lawmakers in recent months, hoping to inject their voices into the fiscal cliff negotiations and swing the tide on disputes over higher tax rates and cuts to entitlement programs. But for start-up founders, the ones behind the high-growth firms responsible for most of the nation’s new jobs, the message to Congress is far less muddied with detailed policy requests. 'Please, just do something.'" J.D. Harrison in The Washington Post.

And what investors are thinking about the fiscal cliff. "Politicians remain locked in a rancorous debate over impending tax increases and spending cuts, and it remains unclear if a deal will be reached by the end of the year. But investors are already betting that lawmakers will do enough to avoid heading over the so-called fiscal cliff." Nathaniel Popper in The New York Times.

KLEIN: The conservative policies falling off the fiscal cliff. "There’s a problem at the heart of the fiscal cliff talks between U.S. President Barack Obama and House Speaker John Boehner. Well, many problems, actually, but one is especially apparent. As they discuss a deal to head off the more than $600 billion in automatic tax increases and spending cuts scheduled for January, Democrats know exactly what they want in higher taxes: $1.6 trillion, achieved mostly through higher tax rates on top earners. Republicans, however, aren’t so sure of what they want from Medicare spending cuts." Ezra Klein in Bloomberg.

BARRO: Why the GOP won't name its spending cuts. "There are big spending cuts that Republicans want that would put big dents in the federal budget. For example, they would like to repeal all of the coverage-expansion components of Obamacare, which would reduce spending by nearly $1.7 trillion over 10 years. And as Chait notes, they would also like deep cuts to Medicaid; the latest version of Paul Ryan’s budget cut the program by about $800 billion over 10 years, in addition to the savings from repealing Obamacare." Josh Barro in Bloomberg.

HENNINGER: The Republicans need to articulate a vision in fiscal cliff talks. "Republicans [are helping] Barack Obama dismantle their party by letting its most basic conservative principles disappear into the Beltway's smoke and mirrors...One issue sits at the center of all this: the Size of Government. Yes, the arcane detail is unavoidable. But what mere voters want to know is whether this means the government or the private sector is going to lead and shape the U.S. economy for a generation. Is 'preserving the safety net' now the single most important existential reality in the life of every U.S. citizen, as in Europe, or is the core American idea still about something more exciting than that?" Daniel Henninger in The Wall Street Journal.

WESSEL: Putting brakes on deficit cuts. "With all the haggling over tax increases and spending cuts to avert the fiscal cliff, is it possible the federal budget deficit is shrinking too fast?...It isn't only the improving economy that is automatically reducing the deficit, it is the retreat in federal stimulus spending and cuts by state and local governments. After the huge fiscal stimulus of a few years ago which offset the contraction in consumer and business demand, government has gone into reverse: It now is a drag on growth, and that is likely to continue in 2013." David Wessel in The Wall Street Journal.

Dodge, dip, duck, dive interlude: Glenn Hubbard falls, but he gets up again. You’re never going to keep him down.

Right-to-work in Michigan

Groups vow to push ‘right-to-work’ in other states. "National unions, caught flat-footed in the Wolverine State, pledged to offer fierce opposition wherever the idea crops up next. They consider the laws a direct attack on their finances and political clout at at time when labor influence is already greatly diminished. In addition, few Republican governors who could enact such legislation seem eager to bring the fight to their states." Felicia Sonmez and David A. Fahrenthold in The Washington Post.

Interview: Nelson Lichtenstein, a labor historian at University of California, Santa Barbara, on right-to-work: 'Can we have a liberal America without unions? History says no.'.

KLEIN: The misleading framing of 'right-to-work.' "The genius of the 'right-to-work' laws is that it makes it seem unusual that you have to agree to follow the terms of the contract that your prospective employers has negotiated with his employees. In fact, what’s unusual is that 'right-to-work' laws allow you to opt-out of one part of that contract -- the part that your fellow employees have negotiated. You still have to follow all the parts your employer added." Ezra Klein in The Washington Post.

KINSLEY: The conservative case for right-to-work. "So why should you have to join a union in order to keep your job? Answer: You don’t have to. But in non-right-to-work states, if your contract provides so, you do have to pay union dues. Otherwise, there is that free-rider problem. For principled conservatives, there is another question: Why should there be laws that limit the freedom of individual employers to negotiate any deal they want with their employees? Or at least that ought to be a question for conservatives, though I’ve never seen any of them struggling with it." Michael Kinsley in Bloomberg.

TUCCILLE: The libertarian argument against right-to-work. "The ideal role for the government in business-labor relations is to stay the hell out of it and let the parties work things out themselves. I may prefer one outcome or another, but I don't have the right to enforce it by law, and that's what right-to-work legislation does." J.D. Tuccille in Reason.

Right-to-rap interlude: 'The Daily Show' raps about right-to-work.

The economy

U.S. corps. underinvest by $175B, S&P says. "U.S. corporations cut an estimated $175 billion in investment from 2009-2011, according to ratings agency Standard & Poor's, in a move that boosted the cash reserves that have helped them through the financial crisis, but could eventually harm their competitiveness." Tom Gara in The Wall Street Journal.

Strange prison-reform ideas interlude: Read sentences in books, reduce your sentence in jail.

Medical care across the states and the world

U.S. backs United Nations measure in favor of universal health coverage. "The United States has backed a United Nations draft resolution favoring universal healthcare coverage. The nonbinding measure calls on U.N. member states to ensure citizens' access to health insurance, and was approved by the U.N. General Assembly on Wednesday." Elise Viebeck in The Hill.

Pennsylvania rejects exchange. "The federal government will be running Pennsylvania's insurance exchange, Republican Gov. Tom Corbett said Wednesday. Corbett is just the latest Republican governor to reject a state-based exchange -- the centerpiece of President Obama's signature healthcare law." Sam Baker in The Hill.

...But Idaho embraced it. "Idaho will be the fifth Republican-led state to participate in a key element of President Barack Obama's health care reform law, Gov. C.L. 'Butch' Otter announced Tuesday. Otter, like his GOP counterparts in New Mexico, Nevada, Iowa and Mississippi, isn't a supporter of the health care law, but said he wanted Idaho to exert some influence over the law's effect on state residents." Jeffrey Young in The Huffington Post.

...And Nevada is going to expand Medicaid. "Saying it will save Nevada money in the short-run despite posing a long-term burden on the state’s general fund budget, Gov. Brian Sandoval announced today he will expand Medicaid to provide health insurance for more low-income Nevadans under the Affordable Care Act." Anjeanette Damon in The Las Vegas Sun.

Study: Healthcare costs rising faster than wages. "The cost of family health coverage rose substantially faster than incomes between 2003 and 2011, straining household budgets even as benefits offered families less financial protection. The findings came as part of a new study by The Commonwealth Fund that highlighted healthcare's increasing share of the U.S. economy and family spending. Commonwealth, a nonprofit research foundation, found that family premiums for employer-based coverage surged 62 percent between 2003 and 2011 as average median incomes grew by only 10 percent." Elise Viebeck in The Hill.

Read: The Commonwealth Fund's report, "State Trends in Premiums and Deductibles, 2003–2011: Eroding Protection and Rising Costs Underscore Need for Action".

Dodge, dip, duck interlude: Glenn Hubbard falls, but he gets up again. You’re never going to keep him down.

Et Cetera

OPEC leaves production quotas in place. Stanley Reed and Clifford Krauss in The New York Times.

Energy Dept. makes wind investment outlays. Jon Hurdle in The New York Times.

The Libor conundrum: How the world throws out the rate used around the world. Danielle Douglas in The Washington Post.

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

Wonkbook is produced with help from Michelle Williams.

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