Here's what happened yesterday: House Republicans agreed to extend the payroll tax cut for two months. Two. Months. The road to that two-month extension was a tough one for them, and it provided a delightful, high-stakes conflict for the press, and so their ultimate capitulation is being treated as a very big deal. But they have simply punted on the payroll tax cut for 60 days. The question is what happens when those 60 days are up.

House Speaker John Boehner speaks to the media about a compromise to extend the payroll tax extension in Washington on Dec. 22. (Joshua Roberts/BLOOMBERG)

By the same token, the lessons the Democrats' took matters, too. And that one seems easier to predict: don't spend too much time negotiating with Republicans. That's not to say there won't be negotiations in the conference committee, but in the end. Democrats refused Boehner's entreaties to return to town and hold fresh talks with House Republicans, and without Democrats providing the cover of negotiations, House Republicans were unable to resist the pressure to simply extend the payroll tax cut.

That said, Democrats have gotten two more months of most of what they negotiated in the 2010 tax deal in return for, well, pretty much nothing. If they get a full year, that deal will look better and better. At the time, the trade was that Republicans got about $125 billion in high-income tax cuts and Democrats got a bit more than $200 billion in the payroll tax cut, unemployment benefits, and sundry other stimulus provisions. If most of those provisions are extended through 2012, then Democrats will have gotten $400 billion -- or perhaps even a bit more -- in stimulus in return for that $125 billion in upper-income tax cuts.

Programming note: Wonkbook will be off on Monday, but on for the rest of next week.

Top stories

1) The House GOP caved on the payroll tax break, reports Rosalind Helderman: "Facing withering criticism from across the political spectrum and abandoned by Senate allies, House Republicans bowed to political reality Thursday and agreed to a two-month extension of a payroll tax cut for 160 million Americans. The agreement represented a remarkable capitulation on the part of House Republicans, who had two days earlier rejected such a deal with Democrats as the kind of half-measure that their new majority was elected to thwart. And it amounts to a Christmas gift for President Obama, who attempted to paint his Republican opponents as willing to raise taxes for millions of Americans. Such an image could have cost the party politically just as it is gearing up to try to take back the White House and the Senate in 2012."

2) House Republicans helped Obama win the standoff, reports Jackie Calmes: "What surprised the administration, and not least Mr. Obama, was how much House Republicans would contribute toward the White House’s goal through their miscalculations in waging this holiday-season showdown over tax cuts for 160 million workers and assistance for several million jobless Americans. The stand by House Republicans, which openly divided the party and put them in conflict with Senate Republicans, helped Mr. Obama perhaps as much as anything the White House and Congressional Democrats did...Congressional Democrats have long been suspicious that Mr. Obama was too eager to cut deals with Republicans that would benefit him politically but not his party -- by reducing Medicare and Social Security spending, for example, to get a so-called grand budget bargain. But this week they freely credited him with the victory, for his persistence and his refusal in the endgame to negotiate with House Republicans."

3) The deal cuts unemployment benefits, reports Arthur Delaney: "A top ranking Democrat in the House of Representatives on Tuesday defended his party's support for cutting 20 weeks of unemployment benefits, a position that has escaped much notice in the payroll tax cut debate consuming Washington. Democrats want the House to pass a Senate bill that would postpone the January expiration of federal unemployment programs for two months. But even if it is reauthorized, one of those programs will automatically phase out next year, unless Congress changes federal law to allow states to keep it, a provision not included in the Senate bill. 'There are things in this bill as we pointed out that we had to make concessions on,' House Minority Whip Steny Hoyer (D-Md.) said Thursday in response to a question from HuffPost."

4) The Fed is considering signaling low rates through 2014, report Luca di Leo and Jon Hilsenrath: "The Federal Reserve could signal it is likely to keep short-term interest rates near zero into 2014 or beyond, to bolster the fragile economic recovery. Fed officials have grown increasingly uncomfortable with their August statement that they are likely to hold short-term rates exceptionally low at least through mid-2013. Some believe low inflation and high unemployment could warrant low rates for longer. Updating the view on rates has become an important part of Fed discussions about how the central bank explains its goals and policies to the public. Officials could agree at their next policy meeting Jan. 24-25 to a broad revamp of their communications. When the Fed revises its communications approach, there is a good chance it will cease offering a fixed date for the timing of rate increases."

Top op-eds

1) Republican were totally had on the payroll tax break, writes Charles Krauthammer: "The Democrats set a trap and the Republicans walked right into it. By rejecting an ostensibly bipartisan 'compromise,' the Republican House was portrayed as obstructionist and, even worse, heartless -- willing to raise taxes on the middle class while resolutely opposing any tax increases on the rich. House Republicans compounded this debacle by begging the Senate to come back and renegotiate the issue, thus entirely conceding the initiative to Majority Leader Harry Reid. But Reid had little incentive to make any concessions. House Republicans would have taken the fall for 160 million shrunken paychecks. The GOP’s performance nicely reprises that scene in 'Animal House' where the marching band turns into a blind alley and row after row of plumed morons plows into a brick wall, crumbling to the ground in an unceremonious heap. With one difference: House Republicans are unplumed."

2) GOP presidential candidates are just making stuff up at this point, writes Paul Krugman: "Consider what Mr. Romney actually said on Tuesday: 'President Obama believes that government should create equal outcomes. In an entitlement society, everyone receives the same or similar rewards, regardless of education, effort, and willingness to take risk. That which is earned by some is redistributed to the others.'...Mr. Obama has never said anything suggesting that he holds such views, and, in fact, he goes out of his way to praise free enterprise and say that there’s nothing wrong with getting rich..Over all, Mr. Obama’s positions on economic policy resemble those that moderate Republicans used to espouse. Yet Mr. Romney portrays the president as the second coming of Fidel Castro and seems confident that he will pay no price for making stuff up."

3) The British model is beating the EU at this point, writes Michael Gerson: "The last few years have revealed the relative strengths and weaknesses of the British and continental models. Yes, the United Kingdom remains an economic mess, with 0.5 percent growth and a budget deficit at almost 10 percent of gross domestic product. But Britain has provided investors with political reassurance. It has a stable coalition government that has pushed for emergency budget reductions. It remains free to manage its own currency and set its own interest rates. As a result, British bonds are regarded as a safe harbor. In contrast, the euro zone has bumped along from crisis to crisis, doing the minimal amount to avoid immediate disaster... seems destined for policies that impose austerity without promoting competitiveness and economic growth -- a recipe for public resentment."

4) A bubble in mortgages is growing, writes Edward Pinto: "The 30-year fixed-rate mortgage, the most common way U.S. buyers finance a home purchase, isn’t the ideal instrument its supporters claim it to be. First, its dominance requires permanent government subsidies. Second, it amortizes slowly, exposing homebuyers to years of unnecessary default risk. Third, it was responsible for two taxpayer bailouts in the last 20 years. Most important, these mortgages may be behind a new bubble. The combination of a federal funds rate of almost 0 percent since late 2008 and injections of money into the economy through quantitative easing by the Federal Reserve has kept borrowing rates artificially low...Federal policy has, in effect, created a closed system whereby the government subsidizes the rate on 30-year mortgages, guarantees the credit risk and then puts itself on the hook for most of the interest-rate risk."

Late night interlude: Beyoncé plays "Countdown" on Late Night with Jimmy Fallon.

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Still to come: Calls for QE in Europe are growing; Medicare enrollment is going up; environmentalists are rallying to the administration's new mercury rule; and a supercut of the year's movies.


Calls for quantitative easing in Europe are growing, reports Ralph Atkins: "A top European Central Bank policymaker has called for 'quantitative easing' to be used to boost the eurozone economy if deflation risks emerge across the 17-country region. The comments by Lorenzo Bini Smaghi, ECB executive board member, are the strongest indication yet that the central bank would expand its policy tools to prevent a possible disastrous economic slump in continental Europe...So far, ECB policymakers have been wary about commenting on using “quantitative easing” - creating money and buying assets - if necessary to boost growth prospects. But his comments indicated its possible use had been debated within the central bank...Mr Bini Smaghi stressed the importance of central bankers acting decisively. He did not rule out the ECB stepping up its intervention in eurozone government bond markets."

Jobless claims are down, reports Neil Irwin: "There has been some good news for job-seekers in recent weeks: a steep drop in the unemployment rate last month and fewer people filing for unemployment insurance benefits than at any other time in more than three years. But the apparent progress masks an unpleasant reality. The job market is frozen in place. Employers aren’t slashing jobs, but they also aren’t adding them on any large scale. Workers who have jobs are holding onto them, so that there are fewer openings for the young and unemployed to fill. The ratio of working-age people with a job has been unchanged basically for two straight years. It beats the massive job cuts of 2009, but there are frustratingly few signs that the job market will return to health anytime soon...The number of people employers have been hiring has remained mired far below pre-recession levels, and little changed over the past year."

US economists are trying to figure out how European bank failures will affect us, reports Steven Mufson: "As European banks unwind, will the U.S. recovery come undone? That’s what U.S. economists are trying to figure out as European banks, scrambling to strengthen their balance sheets, cut back on lending to American businesses and households. Princeton University economist Hyong Song Shin said in a recent paper that European banks have played a much bigger role in the U.S. economy than has been generally thought -- and could do a lot more damage than expected as they pull back. Shin says European banks grew not only by making direct loans to U.S. businesses but also by sucking up vast U.S. money-market deposits and purchasing U.S. mortgage securities. During the previous decade, 'European banks may have played a pivotal role in influencing credit conditions in the United States.'"

The UK's central banker wants his European counterparts to step up, reports Julia Werdigier: "The outlook for financial stability in Europe has worsened since September as Europe’s debt crisis started to affect the financial system and economic growth prospects, Mervyn King, the vice chairman of the European Systemic Risk Board, said Thursday. Mr. King, the governor of the Bank of England, urged banks to meet stricter capital requirements by paying out less in bonuses or to shareholders in dividends instead of curbing lending to the real economy. The recent step by the European Central Bank to provide the region’s banks with cheap financing will ease pressures on financial institutions in the medium term but is no long-term fix for a lending market that needs to be revitalized, he said. 'Overall conditions have worsened,' Mr. King said at a news conference in Frankfurt after a meeting of the board."

Holiday hiatus interlude: A montage of April from "Parks and Recreation" not caring about things.

Health Care

Medicare enrollment is surging as baby boomers retire, reports Lori Montgomery: "Throughout Medicare’s 46-year-old history, monitoring the cost of the government health plan for the elderly has been a bit like the old joke: No one asked if spending would jump. They only asked how high. But in early 2010, the number crunchers at Medicare headquarters in Baltimore saw something surprising: a sharp drop in the volume of doctor visits and other outpatient services. Instead of growing at the usual 4 percent a year, the number of claims was suddenly climbing by less than 2 percent...Budget analysts treat the news as a temporary aberration that is unlikely to brighten a bleak outlook dominated by this fact: An average of 10,000 baby boomers will turn 65 every day for the next 20 years, eventually doubling the program’s enrollment...But the drop serves to highlight an often-overlooked truth: Medicare spending per person is rising more slowly than spending in the private health sector."

Health experts want more health services to be provided by non-doctors, writes Darius Tahir: "Across the field, health care experts speak in unison about the need for health workers with varying credentials to take on a number of responsibilities that are currently the sole purview of doctors...Several obstacles stand in the way of this vision becoming a reality, however. To begin, a morass of state laws blocks nurses and other non-MDs from performing many tasks. According to a report from Kaiser Health News, Colorado recently became the 16th state to allow nurse anesthetists to work without a doctor’s oversight. The specificity of the change suggests the scope of the challenge: Each change is approved piecemeal, often over the objections of physicians’ groups...In addition, there’s another, cultural obstacle standing in the way of non-MDs taking on greater responsibilities...Patients are biased in favor of physicians."

Supercut interlude: A mashup of movies from 2011.


Environmentalists are rallying to the EPA's new mercury rule, reports Erica Martinson: "Environmentalists rallied so hard for the Obama administration on Wednesday, you’d think power plants were shooting cotton candy from their smokestacks. It hasn’t been an easy year for the greens, who are usually considered in the bank for a Democratic president. In the summer, President Barack Obama pulled back an EPA attempt to tighten smog standards, dismaying a wide array of environmental allies...The Sierra Club is running a television ad campaign beginning Thursday in Columbus and Cincinnati, in the crucial swing state of Ohio, thanking Obama for 'life-saving protections from toxic mercury.' 'We commend President Obama for this life-saving result,' Earthjustice President Trip Van Noppen said in a statement."

China says new EU emissions rules could start a trade war, reports Simon Rabinovitch: "China has warned the European Union to abandon its controversial carbon tax on airlines or risk provoking a global trade war. Adding weight to the warning, an industry insider told the Financial Times that the Chinese government was seriously considering measures to hit back at the EU if it insists on charging international airlines for their carbon emissions. In a case initiated by US airlines, the European Court of Justice ruled on Wednesday that the EU’s carbon emissions trading scheme did not infringe on the sovereignty of other nations, and that it was compatible with international law. The change is set to go into effect from January 1...Mr Chai was optimistic that concerted global pressure could yet persuade the EU to repeal its law."

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