Read through Wonkbook today and you'll get both the best case for reelecting President Obama, and the single issue most likely to stand between him and a second term.


But Obama's reelection won't be decided in the pages of newsweeklies. It will be largely decided by the state of the economy. And the state of the economy will largely be decided by events in Europe. And Europe's not looking so good.

On Friday, Standard & Poor's downgraded the debt of nine Eurozone countries simultaneously. Then, it downgraded the European Financial Stability Facility -- better known as Europe's rescue fund. The downgrades were expected, and markets gave little more than a plaintive sigh. But they matter. The rescue fund is not fully funded. Instead, it's guaranteed by the major Eurozone powers and expected to borrow what it needs from investors. But the guarantees are only as good as the countries making them. And so if the countries are no longer AAA, then neither is the fund. And if the fund isn't AAA -- and as of this weekend, it's not -- it might have more trouble borrowing, which will in turn make it less effective, which will in turn make the Eurozone that much more unstable, which will in turn make more downgrades that much likelier, which will make the ESFS that much less creditworthy, and so on. Just one more vicious cycle for our friends across the Atlantic.

Perhaps this won't matter much. The Eurozone is already looking towards moving to the European Stability Mechanism, a successor to the rescue fund. But that's not coming online anytime soon. Greece, meanwhile, is on the verge of default. The question is whether it will be an orderly, controlled writing down of debts, or a chaotic market panic. It's the sort of touchy situation that could be managed if the Eurozone could rely on a strong central bank and a serious rescue fund to keep the situation under control, much as investors in American markets could rely on the Fed and Treasury to step in if matters got out of hand in 2009 and 2010. But Europe can't rely on either. And America's continuing recovery -- and, thus, Obama's reelection -- relies on Europe avoiding a total meltdown.

If Europe manages its problems and the economy grows steadily in 2012, Sullivan's take on Obama's record is going to find a lot of support. If Europe falls apart and the American recovery slows to a crawl, the retrospective evaluations of Obama's presidency will not be so kind. Somewhat unfairly to Obama, this isn't in his control, and there's no reason that the success of his policies should be judged based on the unrelated actions of the European Central Bank. But no one said elections are fair.

Top stories

1) S&P cut the credit ratings of nine European nations -- and downgraded Europe's rescue fund, report Judy McKinnon and Carolyn King: "Standard & Poor's downgraded its long-term credit rating on Europe's rescue fund to double-A-plus from triple-A, following its move Friday to lower ratings on nine euro-zone countries. Uncertainty about the triple-A rating on the bailout fund, known as the European Financial Stability Facility, had been growing since the sovereign-debt crisis in Europe escalated last summer. S&P warned in early December that an EFSF downgrade would likely follow any adjustment to the credit ratings of the euro-zone countries that guarantee the fund. France, which lost its triple-A rating from S&P on Friday, is the fund's No. 2 guarantor. The fund said S&P's Monday downgrade won't reduce its €440 billion ($558 billion) lending capacity. 'EFSF has sufficient means to fulfill its commitments under current and potential future adjustment programs until the [European Stability Mechanism] becomes operational in July 2012,' EFSF Chief Executive Klaus Regling said in a statement. The European Stability Mechanism will replace the EFSF as a bailout fund."

@ryanavent: Turns out it's really hard to reduce debt obligations when both the public and private sector try to deleverage really fast, all at once

2) Fears of a Greek default are growing, report Rachel Donadio and Niki Kitsantonis: "As Greece and its lenders prepare for another week of tense negotiations, European officials now say that the task is less to help the country through its troubles than to avoid the sort of uncontrolled default that many experts fear could threaten the global financial system...Adding to the anxieties in financial markets, talks broke down Friday between the Greek government and private lenders over a plan to reduce Greece’s debt by $130 billion, a 'voluntary' default that the troika has demanded before extending more aid. Those negotiations, aimed at forcing hedge funds and other private holders of Greek debt to accept large losses in order to make the country’s debt load more manageable, will resume Wednesday amid rising concerns about the consequences of failure. The markets have taken into account a voluntary default by Greece, most experts say. But financial experts fear the possibility of an 'involuntary' default if the negotiators are unable to reach an agreement. That could unleash violent market reactions that could conceivably produce another market cataclysm like the 2008 bankruptcy of Lehman Brothers and throw the world into another recession."

3) Jon Huntsman ended his presidential campaign, report Dan Balz and Chris Cillizza: "Former Utah governor Jon Huntsman abandoned his quest for the presidency Monday morning with an endorsement of former Massachusetts governor Mitt Romney and an unexpectedly sharp condemnation of the 'toxic' tone that the Republican primary battle has taken...Huntsman did not name names in aiming criticism at his rivals, but he did take a shot at President Obama for engaging in what Huntsman called 'class warfare' and said it contributed to divisiveness in American politics. But Huntsman, who often talked on the campaign trail about rebuilding trust in the political process, made clear that he thinks the GOP race has taken an ugly turn. Huntsman’s move comes less than a week after he placed a weak third in the New Hampshire primary. He had staked his entire candidacy on a strong finish there. Despite the outcome, he had vowed to take his campaign to South Carolina, calling his finish a 'ticket to ride' in the upcoming contest, despite the long odds."

@EzraKlein: Huntsman dropping out. Wants to spend more time with people who aren't GOP primary voters.

@JonHenke: Unfortunately, the executive with the best record of actual conservative accomplishments has now left the race.

4) Congress faces battles over taxes, reports Naftali Bendavid: "As members of Congress return to Washington this week, they face immediate pressure to agree on how to fund a payroll-tax cut, but their task is complicated by lingering hostilities over the issue that are likely to be sharpened by the onset of a hard-fought election year. Republicans are frustrated by the outcome of December's fight over the payroll tax, when lawmakers unable to agree on a long-term plan simply extended the break until the end of February. House Republicans complained the move created uncertainty, but were forced to give in on the extension after Democrats depicted them as blocking a tax cut. The House returns Tuesday and the Senate next week, and lawmakers will immediately plunge back into the fight over the payroll tax. Congress faces a Feb. 29 deadline to extend the popular tax break, which reduces workers' payroll taxes to 4.2% from 6.2%, as well as a program to prolong unemployment benefits."

5) The top one percent is not easily stereotyped, report Shalia Dewan and Robert Gebeloff: "Aspen’s 1 percent is very different from Akron’s. In some areas there are so many 1 percenters that the whole income hierarchy can shift. It may take $380,000 to be in the national 1 percent, but it takes $900,000 to be among the top 1 percent of earners in Stamford, Conn. Compared with that, the price of admission to the 1 percent in Clarksville, Tenn., is a bargain at $200,000. Of course, the cutoff is only one measure, and perhaps not the most telling one. The average income of the 1 percent, according to the Tax Policy Center, is $1.5 million, and the superrich — the 120,000 tax filers that make up the top tenth of this group — earned an estimated average of $6.8 million in 2011."

INTERACTIVE: What percent are you where you live?

Top op-eds

1) Obama's presidency has been vastly more successful than either the right or the left will admit, writes Andrew Sullivan: "'A president in the last year of his first term will always get attacked mercilessly by his partisan opponents, and also, often, by the feistier members of his base. And when unemployment is at remarkably high levels, and with the national debt setting records, the criticism will—and should be—even fiercer. But this time, with this president, something different has happened. It’s not that I don’t understand the critiques of Barack Obama from the enraged right and the demoralized left. It’s that I don’t even recognize their description of Obama’s first term in any way. The attacks from both the right and the left on the man and his policies aren’t out of bounds. They’re simply—empirically—wrong."

Real talk: Sullivan presents a better case for Obama's reelection than anyone on Team Obama has made.

2) Mitt Romney's policy agenda is far more conservative than George W. Bush's, writes Ezra Klein: "Mitt Romney is the most moderate candidate in the Republican primaries. Yes, even more so than the recently departed Jon Huntsman, whose tax-cut proposal was more radical and more regressive, and whose endorsement of Rep. Paul Ryan’s budget put him well to Romney’s right on entitlements. But compared with recent Republican nominees, Romney’s policy platform is quite conservative, and arguably even a bit extreme. George W. Bush, for instance, looks like a Kenyan socialist in comparison."

@justinwolfers: Romney describes his record in terms of gross rather than net jobs created. By that metric, Obama created literally tens of millions of jobs

3) Regulations end up helping corporate giants, writes Reihan Salam: "This year’s election will be all about putting corporate America on trial. We’ve seen that in the nonstop attacks on Bain Capital, and also in the heated anticorporate rhetoric of the Occupy movement. And say this for the prosecution: There is no denying that corporate profits are reaching stratospheric levels while employment levels are essentially stagnant. If you own a piece of Home Depot or Whole Foods or Amazon, congratulations, 2011 was a banner year for you. But if you’re a typical American worker, well, that’s another story...When corporate America thrives and households struggle, people start getting resentful and calling for more stringent regulation to curb the power of profit-hungry American firms. We’ve seen ambitious efforts to increase the regulation of telecommunications, the labor market, the environment and much else. It turns out that this 'anticorporate' agenda of ramping up regulation is actually pro-corporate. Stringent regulations tend to protect incumbent firms from their greatest fear -- innovative start-ups that could drive them out of business."

@fivethirtyeight: I wonder if Romney's tax returns won't be the bigger general election issue than Bain.

4) Bain-style capitalism was good for the United States, writes Ross Douthat: "In the decades after World War II, the United States economy was highly regulated, highly taxed and highly successful. War, tyranny and ideological mania had devastated our competitors, and while Asia stagnated and Europe struggled to rebuild, America grew and grew and grew. It was a golden age for the liberal model of political economy, with a powerful regulatory state presiding over labor-management cooperation and a steadily expanding middle class. But like all golden ages it passed. First in Europe and then in Asia, competitors emerged to challenge the United States’ economic dominance. In this new landscape, the pillars of the postwar economic order began to look like liabilities. Our heavily unionized industries seemed sclerotic, our regulatory system stifling, our tax rates punitive. And so American policy makers, C.E.O.’s and investors responded by changing their priorities -- privileging growth over security, efficiency over equality, and embracing creative destruction on a scale that would have been unthinkable in the America of 1955."

@mattyglesias: When private equity is outlawed, only executives of publicly traded firms will lay workers off to maximize profits.

5) Easing antitrust laws won't spur innovation, writes Matthew Yglesias: "Americans love capitalism, and we also like underdogs, so nothing tickles the culture’s fancy quite like a dynamic small business. But when we boost small firms, are we selling short the value of big ones? That’s what Michael Mandel, chief economic strategist of the Progressive Policy Institute, argues. In a memo published last December, he contends that it’s big companies, not scrappy startups, that are the real drivers of innovation in the modern economy, and that as a consequence the United States needs to ease up on antitrust enforcement. The argument’s gained partial assent everywhere from Mother Jones on the left to National Review on the right to the Economist in between. But while there’s certainly something to it, the purported policy conclusion that we need to start caring less about competition policy is dangerously misguided."

Canada folk interlude: Leonard Cohen's "Going Home."

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

Still to come: Fears of a Greek default grow; drug firms will disclose payments made to doctors; the White House comes out against anti-piracy laws; high speed rail slows down; and a ferret steals from a baby.


China's growth slowed at the end of 2011, report Tom Orlik and Bob Davis: "China's GDP growth slowed to 8.9% in the last quarter of 2011, compared with a year earlier, showing that the world's fastest engine of growth is downshifting. While China's fourth-quarter performance would be the envy of most any other nation--and surprised analysts who had expected a sharper decline--it is still modest by the measure of the past 30 years. China's gross domestic product has soared by an average of 10% growth a year in that period. When measured on a quarter-on-quarter basis, China's growth fell much more rapidly to 8.2%, reflecting slower growth in exports and weaknesses in the country's property market. Late last week, J.P. Morgan forecast that GDP growth will decline further in the current quarter, to 7.2% compared with the fourth quarter of 2011."

Companies are spending on machines while hiring lags, reports Timothy Aeppel: "In no other recovery since World War II have companies been simultaneously faster to boost spending on machines and software, while slower to add people to run them. Part of this is the old story of substituting capital for labor. But a combination of temporary tax breaks that allowed companies in 2011 to write off 100% of investments in the first year and historically low short- and long-term interest rates have pushed that process into overdrive. Hiring, meanwhile, is too slow to bring the unemployment rate down rapidly. Employers have added workers at a monthly rate of 142,000 for the past six months, half the pace needed to significantly reduce unemployment, which is now at 8.5%...Of course, the surge in capital spending isn't the only impediment to hiring. Some employers say they would hire more if there wasn't so much uncertainty, about everything from the durability of demand to tax and regulatory policy. Others complain they can't find qualified workers for the vacancies they have."

Iceland's economy is recovering, reports Brady Dennis: "Iceland’s journey from financial ruin to fledgling recovery is a case study in roads not taken and choices not made by other countries faced with economic calamity in recent years. By the time the United States and Europe began to wrestle with the fallout of the global financial crisis in 2008, this tiny island nation was experiencing full-fledged meltdown. Its bloated banks failed. Its currency collapsed. The prime minister invoked God’s help, and protesters filled the streets. Iceland did what the United States chose not to do -- allow its biggest banks to fail and force foreign creditors to take a hike. It did what troubled European nations saddled with massive debts and tethered by the euro cannot do -- allow its currency to remain weak, causing inflation but making its exports more desirable and its prices more attractive to tourists. Three years later, the unemployment rate has fallen. Tourism has increased. The economy is growing. The government successfully raised money from investors in the summer for the first time since the crisis."

Webcomic interlude: xkcd on Batman.

Health Care

The Obama administration will require drug firms to disclose payments made to doctors, reports Robert Pear: "The Obama administration will require drug firms to disclose payments made to doctors. Many researchers have found evidence that such payments can influence doctors’ treatment decisions and contribute to higher costs by encouraging the use of more expensive drugs and medical devices. Consumer advocates and members of Congress say patients may benefit from the new standards, being issued by the government under the new health care law. Officials said the disclosures increased the likelihood that doctors would make decisions in the best interests of patients, without regard to the doctors’ financial interests."

The recent drop in health care spending isn't sustainable, writes Robert Samuelson: "It turns out that there is a way to control health spending: clobber the economy. When unemployment rises, people lose health insurance. They see doctors less often; they put off elective surgery; they cut back on drugs. Even people with insurance behave similarly, because their pay may be down, they worry about job security or they want to avoid out-of-pocket costs for deductibles or co-payments. Of course, almost no one advocates this as a deliberate policy. But it does seem to work. Call it the Neanderthal Cure to Health Costs. Just last week, new government figures provided fresh evidence. In 2010, U.S. health spending rose a modest 3.9 percent, about equal to 2009’s increase of 3.8 percent. These were the lowest annual increases in the half-century of government estimates. As a result, health spending has stabilized as a share of the economy (gross domestic product). It was 17.9 percent of GDP in both years. In 2010, this amounted to $2.6 trillion, roughly $8,400 for each of the 309 million Americans."

Domestic Policy

The White House opposes parts of anti-piracy bills, reports Edward Wyatt: "The Obama administration said Saturday that it strongly opposed central elements of two Congressional efforts to enforce copyrights on the Internet, all but killing the current versions of legislation that has divided both political parties and pitted Hollywood against Silicon Valley. The comments by the administration’s chief technology officials, posted on a White House blog Saturday, came as growing opposition to the legislation had already led sponsors of the bills to reconsider a measure that would force Internet service providers to block access to Web sites that offer or link to copyrighted material...The bills currently under consideration in Congress were intended to combat the theft of copyrighted materials by preventing American search engines like Google and Yahoo from directing users to sites that allow for the distribution of stolen materials. They would cut off payment processors like PayPal that handle transactions."

But the debate over web piracy regulation will continue, report Jenna Wortham and Somini Sengupta: "When the Obama administration announced on Saturday its opposition to major elements of two Congressional bills intended to curtail copyright violations on the Internet, the technology industry, which has been loudly fighting the proposed legislation, could declare victory. But few people in Silicon Valley or Hollywood consider the battle over. The Motion Picture Association of America, which represents Hollywood studios and is a principal proponent of the antipiracy legislation, suggested that it would continue to push the administration to approve a modified version of the bills, known as the Stop Online Piracy Act and the Protect Intellectual Property Act...The opposition has been fueled by some of the most innovative pieces of the Internet -- Twitter, Facebook, and even the I Can Haz Cheezburger? sites. 'Looks like the Internet is winning a battle against some really bad potential law,' wrote Craig Newmark, the founder of Craigslist, the online classified advertising site, in a blog post on Sunday."

Confused? Everything you need to know about Congress’s online piracy bills, in one post .

The future of Washington is urban, writes Steven Pearlstein: "The next phase of growth in the Washington region will focus on these underdeveloped areas in the eastern quadrants of the District and some of the region’s older, closer-in suburbs. It’s not just smart-growth planners and anti-sprawl activists who think so; most developers I’ve spoken with in recent weeks agree. The models for the future, they say, can be found in Pentagon City rather than Dale City, along the Rosslyn-Ballston corridor rather than the far reaches of the Dulles corridor, in the NOMA area near Union Station and the downtowns of Bethesda and Silver Spring. The pressure of development now points inward toward the Capitol, not outward toward Germantown, Gainesville, Waldorf and Laurel...There are natural limits to how much a metropolitan region can expand its economy and its population by expanding its geographic footprint, and Washington is probably getting pretty close to them. The evidence can be found in the horrible commutes, in the divergent trends in land values at the core and at the periphery, and in the extraordinary cost of extending Metrorail to Loudoun County."

Animals misbehaving interlude: A ferret steals a baby's toy.


High speed rail is losing momentum, reports Michael Fletcher: "Spiraling cost estimates and eroding political and public support now threaten a project crucial to a 21st-century vision of train travel that President Obama promised would transform U.S. transportation much as interstate highways did more than a half-century ago. A national high-speed rail network would not only support tens of thousands of construction and manufacturing jobs, but it would get Americans out of their cars, revitalize struggling downtowns, and spare the environment millions of tons of carbon emissions and travelers untold hours wasted in traffic or in airport terminals waiting out delays. Obama set a goal of providing 80 percent of Americans access to high-speed rail within 25 years. But that lofty vision is yielding to the political gravity generated by high costs, determined opponents and a public that has grown dubious of government’s ability to do big things. Virtually none of the projects has gotten off the ground, and the one that has is in trouble."

The fight over the Keystone pipeline is heating up, reports Juliet Eilperin: "As next month’s deadline nears for the Obama administration to make a decision on the Keystone XL pipeline, interest groups on both sides have launched aggressive campaigns aimed at swaying public opinion...The pipeline, which requires a federal permit from the State Department because it crosses an international border, has been under review for more than three years. In early November, the administration delayed making a national interest determination on the pipeline on the grounds that it needed to avoid crossing sensitive terrain in Nebraska’s Sand­hills region. At the time, officials predicted that the process of rerouting the pipeline and the subsequent environmental review would extend the permitting process into early 2013. But language inserted in last month’s payroll tax extension forces President Obama to make a decision by Feb. 21. Administration officials have said that the truncated timeline makes it difficult to complete a review of whether the pipeline is in the national interest, given the fact TransCanada has yet to outline an alternate route."

Wonkbook is compiled and produced with help from Karl Singer and Michelle Williams.