The conventional wisdom in Washington is that Republicans are losing the payroll tax fight, and bad. And, for the moment, that's true. The issue has pitted Senate Republicans against House Republicans, business conservatives against tea partiers, and everybody against Speaker John Boehner. But the fact of the matter is, not all Republicans are losing this one. Mitt Romney, in particular, owes Boehner -- and his more intransigent members -- a fruit basket.

Republican presidential candidate, former Massachusetts Gov. Mitt Romney speaks at the Stage Restaurant in Keene, NH., Wednesday, Dec. 21, 2011. Romney is kicking off a three day bus tour of the state. (Matthew Cavanaugh/AP)

A 1999 study by Helmut Norpoth reached a similar conclusion: "When it comes to economic policy, it is the President, not Congress, that the electorate holds responsible."

This holds true for more than just voters. The roaring economy of the 1990s is typically attributed to President Bill Clinton, not to the Republicans who had undivided control of Congress from 1994 to 2001. President Ronald Reagan, rather than House Speaker Tip O'Neill -- or President Jimmy Carter, who appointed Federal Reserve Chairman Paul Volcker -- gets credit for the boom in the mid-80s.

Which brings us back to the payroll tax debate. I'd still say it's likely we get a payroll tax extension by February. But the chances that we don't get one have certainly risen substantially. If you believe the economic forecasters, that could shave a half-percentage point off of growth next year. If we were going to grow at 2.3 percent with the payroll tax cut extension, now we're only growing at 1.8 percent. That means more Americans out of work, less money in voters' pockets, more pessimism among business owners. And all that is very, very bad for an incumbent president running for reelection -- in this case, Barack Obama.

Washington seems to be looking at this differently. Republicans look internally divided and publicly foolish. That will last for approximately a week or two. At some point, Republicans will come up with some way to move forward or settle on some message for why they're not moving forward. The debate will become, as so many things in Washington do, a he-said she-said about who really wanted to extend the payroll tax cut. Most voters aren't paying attention to it now, and virtually none will remember it in November 2012, much less connect it to their assessment of the economy.

This reminds me of nothing so much as the Democratic celebration from July of this year, when David Brooks and other Republicans blasted the GOP for resisted Obama's attempts to compromise over the debt ceiling. It looked, to Democrats, like the GOP had truly painted itself into a corner. But in fact, that kind of intra-party criticism is meaningful in Washington and meaningless outside of it. The fight reduced public confidence in Washington and hurt the economy. Afterwards, Obama's approval ratings dropped to a new low.

Which is not to say that the mishandling, or perceived mishandling, of the payroll tax cut doesn't pose a problem for Boehner's speakership, or won't lead to Republicans getting a lot of angry calls from their constituents. It might even hurt House Republicans at the polls. "When people dislike Congress," writes political scientist John Sides, "they punish members of the House majority and reward members of the minority. Opinions about Congress are important even when controlling for other things that affect congressional elections, such as approval of the president or economic conditions in the country. In the article, Jones finds that a ten-point decrease in approval would cost majority-party incumbents about 4 points at the polls."

But in the end, the single most important factor in next year's election will be the economy. The better it does, the better Obama and his party will do. The worse it does, the worse Obama and his party will do. And if the payroll tax cut expires, whether through blundering or through malice, it will hurt the economy, and thus the president. Boehner may not be winning this, but in practice, Mitt Romney certainly is.

In case you missed it: Over the last few weeks, Wonkblog asked an array of economists, investors and economic policymakers to name and explain their favorite chart of 2011. The results — including contributions from Larry Summers, Glenn Hubbard, Mark Zandi, Carmen Reinhart and Kenneth Rogoff, Peter Diamond, Peter Orszag, Rep. Paul Ryan, Sen. Kent Conrad, and 10 others — are here.

Top stories

1) Republicans are fracturing on the payroll tax break, reports Paul Kane: "House Republicans faced mounting pressure Wednesday from critics inside and outside Congress who worry that their standoff with President Obama over whether to extend a payroll tax cut could do lasting damage to the GOP. Former House speaker Newt Gingrich, who is seeking the party’s presidential nomination, warned that the showdown could end badly for Republicans, citing his own experience in losing the political battle to President Bill Clinton during the 1996 government shutdown...The Wall Street Journal’s editorial board captured the frustration among House Republicans in the paper’s Wednesday editions, asking whether the GOP’s handling of the tax debate 'might end up re-electing the President before the 2012 campaign even begins in earnest.' Sen. Bob Corker (R-Tenn.) said the House GOP must get past the issue."

2) The end of this year looks good for the economy, but the beginning of next year looks bad, reports Annie Lowrey: "In recent weeks, a broad range of data — like reports on new residential construction and small business confidence — have beaten analysts’ expectations. Initial claims for jobless benefits, often an early indicator of where the labor market is headed, have dropped to their lowest level since May 2008. And prominent economics groups say the economy is growing three to four times as quickly as it was early in the year, at an annual pace of about 3.7 percent. But the good news also comes with a significant caveat. Many forecasters say the recent uptick probably does not represent the long-awaited start to a strong, sustainable recovery. Much of the current strength is caused by temporary factors. And economists expect growth to slow in the first half of 2012 to an annual pace of about 1.5 to 2 percent. Even that estimate could be optimistic if Washington lawmakers fail to extend aid for the long-term unemployed and a payroll tax cut for the United States’ 160 million wage earners."

3) The European Central Bank lent out almost $640 billion yesterday, report Nelson Schwartz and David Jolly: "After long resisting the kind of financial force Washington used at the height of the financial crisis in 2008, European central bankers on Wednesday pumped nearly $640 billion into the Continent’s banking system. The move raised hopes that the money could alleviate the region’s credit squeeze. Though it is too soon to gauge any longer-term benefits, the move, by the European Central Bank, could be a turning point in the Continent’s debt crisis -- a cascading problem that for nearly two years has plagued financial markets around the world and now threatens global economic growth. American officials and global economists have long urged the Europe’s central bank to take just such an aggressive stance."

4) Obama is pressuring Boehner directly to pass the payroll tax deal, report Janet Hook and Laura Meckler: "President Barack Obama on Wednesday inserted himself directly into the congressional impasse over legislation to avert a Jan. 1 tax increase, but there was no sign of a breakthrough as Republicans found themselves in disarray on one of their signature issues. House Speaker John Boehner publicly gave little ground to the president or to growing pressure from fellow Republicans, many of whom see the standoff as damaging to their party. In a 10-minute phone call with the Ohio Republican, Mr. Obama urged the House to approve a two-month extension of the current, lower tax rate, and promised to negotiate a longer extension in the new year, according to administration and congressional officials. Mr. Boehner reiterated House GOP complaints that two months is too short for a tax-cut extension."

5) Romney's private equity past is causing problems for him, reports Jia Lynn Yang: "As Mitt Romney touts his business experience in the Republican presidential primaries, he has started facing questions about his abiding faith in 'creative destruction.'...Possibly no industry better embodies this worldview than private equity, the controversial and highly lucrative business that Romney helped shape in the 1980s and 1990s and that, in turn, earned him millions of dollars and molded his perspective on how the economy works...The results have been good for investors and, some experts argue, good for the broader economy as companies have grown more efficient. But for those who lost their jobs as private equity firms churned out profits, the sting of seeing their companies turned into vehicles for greater efficiency is harder to live with."

Top op-eds

1) No Labels actually has a real, workable agenda, writes Ezra Klein: "Enter No Labels. Rather than confine themselves to wishful thinking about a third-party candidacy or endless scolding over partisanship, its members have come out with a robust agenda for congressional reform...Some of the items on No Label’s agenda would transform the workings of sclerotic and dysfunctional institutions. Nominations to executive or judicial positions, for instance, would get an up-or-down vote after 90 days. If the federal budget was late, members of Congress wouldn’t get paid. Filibustering senators would actually have to do the Mr.-Smith- Goes-to-Washington thing and hold the floor of Congress by talking. No more filibustering without actually working for it. Oh, and filibusters could only be mounted against the passage of a bill -- currently, the motion to move to debate is frequently filibustered, which means the filibuster is used to choke off debate rather than protect it."

2) Europe must allow countries to default, writes John Cochrane: "Europe has taken a plain-vanilla sovereign restructuring and turned it into a banking crisis, a currency crisis, a fiscal crisis, and now a political crisis. When the era of wishful thinking ends, Europe will face a stark choice. It can have a monetary union without sovereign defaults. That option means fiscal union, accepting real German control of Greek and Italian (and maybe French) budgets. Nobody wants that, with good reason. Or Europe can have a monetary union without fiscal union. That would work well, but it needs to be based on two central ideas: Sovereigns must be able to default just like companies, and banks, including the central bank, must treat sovereign debt just like company debt. The final option is a breakup, probably after a crisis and inflation. The euro, like the meter, is a great idea. Throwing it away would be a real and needless tragedy."

3) We need more highly skilled immigrants, writes Robert Guest: "Most of the growth in the global economy is in emerging markets. And the diaspora effect is very large. For example, an estimated 70% of the world's foreign direct investment in China passes through ethnic Chinese who live outside mainland China...If America wants to tap the gusher of innovation that is starting to come out of emerging markets, it has to keep letting in immigrants from those places. Some will stay; others will eventually go home. Either way, they will keep ideas flowing through America. A study by the Kauffman Foundation found that two-thirds of Indian entrepreneurs who move back to India from America maintain at least monthly contact with their former colleagues in the U.S. Chinese returnees are nearly as chatty."

Animated video interlude: of Montreal's "Wraith Pinned to the Mist".

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

Still to come: Not extending the payroll tax break could really hurt the economy; Congress has until January 18 to pass a doc fix; regulators announced new union organizing rules; the EPA unveiled new mercury rules; and soft drink ads were slightly different in the 1960s.


Not extending the payroll tax break could do real damage to the economy, reports Neil Irwin: "If Congress does not reach agreement on extending payroll tax cuts and unemployment insurance benefits that are set to expire at the end of the year, the U.S. economic recovery will be at risk, economists say. Without a deal, most American workers would receive less money in their first paycheck of 2012, with a typical earner getting about $20 per week less after taxes. Also, jobless benefits would be cut off for about 3.5 million people who have been unemployed for long periods -- up to 99 weeks. The economy is in a delicate spot, barely growing fast enough to keep the unemployment rate from rising. A tax increase in 2012 could slow economic growth enough to make the jobless rate rise again. At the least, the tax increase could make the economy more vulnerable to outside shocks, such as last year’s spike in oil prices or new financial turmoil in Europe."

US exporters are braced for a European slowdown, reports Peter Whoriskey: "The European Central Bank’s decision Wednesday to offer loan help to the region’s financial institutions was closely watched by U.S. companies, which have extensive ties to troubled European markets. Boeing warned that European banks would cut lending to companies that buy planes. Pharmaceutical companies Pfizer and Bristol-Myers Squibb have said cash-strapped European governments that provide health care are cutting what they spend on drugs. And other U.S. exporters to the region, such as almond farmers, medical equipment manufacturers and car makers, must brace for the possibility that a European recession will depress their sales...The crisis for European banks, which are under pressure to reduce their portfolios, is making it more difficult for companies and investors around the world to secure financing."

Businesses aren't happy about the two-month payroll tax extension proposal, reports John McKinnon: "The battle over extending a payroll-tax holiday is creating headaches for businesses, and highlights Washington's growing penchant for short-term fixes in tax policy. On Wednesday, with expiration looming for the payroll-tax cut, House Republicans remained opposed to a bill passed by the Senate to extend it for two months. The fix was designed to give lawmakers more time to work out a deal to extend the measures for the rest of the coming year in a way that would avoid adding to future budget deficits. If the two-month extension passes, it would mark one of the briefest tax measures yet, accelerating the recent trend in Congress toward last-minute brinkmanship and short-term compromises on taxes...Payroll executives complain that the two-month extension would pose problems for them to manage, even if it's followed by a full-year extension."

Bank of America has come to a $335 million settlement, reports Brady Dennis: "Bank of America agreed Wednesday to pay $335 million to settle federal claims that its Countrywide Financial unit charged black and Hispanic borrowers higher mortgage fees in the lead up to the financial crisis and steered them into riskier loans than their white counterparts. Obama administration officials said the settlement, the largest ever for fair-lending claims, came after investigators reviewed more than 2.5 million home loans originated by Countrywide during the housing boom. Investigators concluded that Countrywide charged more than 200,000 blacks and Hispanics higher fees and interest rates than comparable white borrowers between 2004 and 2008. In addition, officials claim the firm advised more than 10,000 minority borrowers to take riskier and more costly subprime loans, even though they could have qualified for more traditional mortgages."

Vintage commercial interlude: A 1960s ad for "Chills and Thrills" frozen soft drink.

Health Care

The hard doc fix deadline is January 18th, reports Julian Pecquet: "Almost 650,000 doctors will see a steep cut to their Medicare payments on Jan. 18 if Congress doesn't act before then, the Medicare agency warned. The Centers for Medicare and Medicaid Services in the past has been able to delay payments for more than 20 days as lawmakers hashed out legislation to prevent scheduled cuts. But doing so almost crashed agency computer systems that are designed to expedite payments, The Associated Press reports. 'We feel that [Medicare] came very close operationally to crashing our system back in 2010,' Medicare deputy administrator Jonathan Blum told the wire service. 'From a stewardship perspective, that is something we feel we can never repeat again.' As a result, the agency told doctors on Monday that it would hold their claims for 10 business days while waiting for Congress to avert the looming payment cut, scheduled to take effect Jan. 1."

The administration is opting again and again to defer to states on health care, report Gardiner Harris, Reed Abelson, and Robert Pear: "The Obama administration’s surprise announcement Friday that it planned to give states broad leeway to pick the benefits offered under the federal health care law offers yet another example of a gradualist approach to carrying out its signal domestic policy achievement...In passing a good deal of the decision-making to states, the administration has guaranteed that Americans will continue to face a patchwork of state regulations that make coverage uneven and inefficient. People in Utah and Wyoming, for example, are likely to have more limited access to expensive services now mandated in states like Massachusetts and Maryland -- at least until 2016, when a senior administration official said the federal government plans to determine which state-mandated benefits are not essential."

Domestic Policy

The NLRB unveiled new union organizing rules, reports Melanie Trottman: "New federal rules unveiled Wednesday will make it tougher for employers to stall union-organizing drives inside the workplace, one of the biggest changes in decades to how workers join unions. The changes, which take effect April 30, delay employers' ability to complete a legal challenge that can drag out the process of voting to form a union at a private-sector workplace. Companies often contend that certain workers aren't eligible to vote on union formation because they're actually management, or that certain part-time workers should be excluded from the vote. For some employers, these challenges keep unions from taking hold for months or years. But under the new rules, employers will have to defer appeals of their legal challenges until after workers hold the vote, when many employer challenges become moot if a union loses the election."

Block grant cuts are leading cities to make hard choices, reports Michael Cooper: "It is no secret that these are hard times for cities, with tax collections down, state aid dwindling, unemployment high and foreclosures pitting many blocks. So, as he sat in his office here, Mayor Ed Pawlowski of Allentown echoed the question mayors around the country are asking: Why has Washington cut one of the main federal programs for cities by a quarter in the last couple of years?..The shrinking federal program, called Community Development Block Grants, was devised by the Nixon administration to bypass state governments and send money directly to big cities, which were given broad leeway to decide how to spend it. This year the federal government is giving out just $2.9 billion -- a billion dollars less than it gave two years ago, and even less than it gave during the Carter administration, when the money went much further."

Adorable children getting freaked out interlude: This Chilean baby does not care for the Chilean national anthem.


The EPA has unveiled new mercury rules, reports Juliet Eilperin: "The Environmental Protection Agency announced Wednesday a regulation more than two decades in the making that requires coal- and oil-fired power plants to control emissions of mercury and other poisons for the first time...Congress gave the EPA the authority to limit these 1990, but disagreements among federal regulators, industry officials and activists over how best to regulate them have stalled action until now...The EPA estimates the new regulation’s safeguards -- which are slated to fully take effect in three years -- will prevent as many as 11,000 premature deaths and 4,700 heart attacks a year by 2016 and will cost the industry $9.6 billion in compliance that year. By comparison, the agency projects reducing these emissions will save between $37 billion and $90 billion in 2016 in annual health costs and lost workdays."

The EU is moving ahead with flight emissions rules, reports Nicola Clark: "The European Union’s highest court on Wednesday endorsed the bloc’s plan to begin charging the world’s biggest airlines for their greenhouse gas emissions starting Jan. 1. The move sets the stage for a potentially costly trade war with the United States, China and other countries. A group of United States airlines had argued that forcing them to participate in the potentially costly emissions-trading system infringed on national sovereignty and conflicted with existing international aviation treaties. But in a final ruling, the European Court of Justice in Luxembourg affirmed an opinion issued in October by its advocate general, who had rejected that claim...The court’s decision comes amid increasing pressure from some of the biggest trading partners of the 27-member bloc to suspend or amend application of the legislation to expressly exclude non-European Union countries."

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