If you ask political scientists what decides elections, they won't say the unemployment rate. It's actually hard to find a particularly tight relationship between the unemployment rate and election outcomes. Nor will they simply say the economy, as that's too broad to be of much use. They'll say the "change in real disposable income." Which makes sense. We talk about people voting their pocketbooks. Well, the change in real disposable income measures whether the average pocketbook has gotten lighter or heavier.
I've spent the last few months asking pretty much everyone I could think of whether it had to be this way. Whether, to borrow a framing device from Carmen Reinhart and Vincent Rogoff, this time could have been different. And the answer, as far as I can make it out, is, well, maybe. Probably. A bit different, certainly. But probably not that different. Probably not as different as we would like.
It's indisputable that many in the political class didn't fully understand the severity of the recession at the outset. “I don’t think it’s too much of an exaggeration to say that everything follows from missing the call on Reinhart-Rogoff, and I include myself in that category,” Peter Orszag told me. But getting that call right before the rest of the political system, and the economic data, was ready to affirm it, wouldn't necessarily have led to a radically different policy response.
It might have meant a longer stimulus with more focus on infrastructure, and perhaps kept the administration from overselling the stimulus and leaping at every opportunity to claim that a recovery was underway. Maybe there would have been more emphasis on efforts to manage the pain of the recession through programs subsidizing workplaces that cut hours rather than cutting jobs and through direct hiring ideas, like Christina Romer's proposal to add 100,000 new teacher's aides. But it's not clear that there were many gamechangers on the table.
The full article, which goes through many more possibilities, is here. For the administration's purposes, however, the counterfactuals don't do them much good. This time wasn't different. Median incomes have falled by almost 10 percent over the last three years, and today we are talking about a potential double-dip, not a speedy recovery.
Perhaps the forecasters are overestimating how bad the next year will be, just as they underestimated this recession back in 2007. The administration had better hope so. if there's one silver-lining in the data for them, it's that voters appear to respond most strongly to changes in income in the year before the election, not in the whole of the president's term. But that's only a silver lining if median incomes actually grow over this next year.
On a happier note, congratulations to Thomas Sargent and Christopher Sims, who won the Nobel Prize in economics this morning. Check back on the blog later today for an introduction to their work.
1) Could this time have been different? "'Now knowing how much worse the storm was, people look back and say, you guys undershot,' sighs Treasury Secretary Timothy F. Geithner. 'But we didn’t think we were undershooting at the time. We thought that the dominant strategy had to be massive, overwhelming force. There were political limits to what we could do, but we thought we were operating to expand the scope of those limits. I used to say to people, ‘Which mistake is harder to correct: doing too much, or doing too little?’ Yet the Obama administration did too little. Its team of interventionist Keynesians immersed in the lessons of the Depression and Japan did too little. Everyone does too little, even when they think they’re erring on the side of doing too much. That’s one reason 'this time' is almost never different. The tendency thus far has been to look at these crises in terms of the identifiable economic factors that make them different from typical recessions. But perhaps the better approach is to look at the political factors that make them turn out the same, that stop governments from doing enough even when they have sworn to err on the side of doing too much."
2) France and Germany are nationalizing Belgium's biggest bank, reports Michael Birnbaum: "The governments of France and Belgium agreed to nationalize Belgium’s largest bank on Sunday as the Greek debt crisis took its biggest victim yet, while France and Germany’s leaders promised a far-reaching package of measures to stabilize Europe’s banks. Dexia, a Franco-Belgian bank that had a debt exposure totaling more than $700 billion at the end of June -- more than twice the size of Greece’s annual economic output -- had invested heavily in European government bonds whose value is now under question. The nationalization is a sign of the spiraling problems facing European banks and governments, and it may threaten Belgium’s credit rating, making it one of the countries on shaky financial ground alongside Greece, Ireland, Italy, Portugal and Spain. German Chancellor Angela Merkel and French President Nicolas Sarkozy said...Sunday that they are ready to recapitalize banks that have been shaken by the debt crisis."
3) A millionaire's surtax would more than pay for the jobs plan, reports David Rogers: "The Congressional Budget Office said Friday the Senate Democrats’ proposed surtax on millionaires would raise $452.7 billion over 10 years, more than enough to pay for the $447 billion in spending and tax cuts included in President Barack Obama’s jobs bill. In a letter to Senate Majority Leader Harry Reid, the CBO estimated the net deficit reduction would be $6 billion, a modest impact but still added ammunition for the Nevada Democrat in trying to unite his caucus going into floor votes next week. The proposed of 5.6 percent surtax would take effect in 2013 and apply to a taxpayer’s modified adjusted gross income in excess of $1 million or $500,000 in the case of a married individual filing a separate return. It would be indexed for inflation, but the CBO cited estimates showing a more than doubling in the annual tax revenue increase from $28.4 billion in 2013 to $68.633 billion in 2021."
4) Incomes kept falling after the recession ended, reports Robert Pear: "In a grim sign of the enduring nature of the economic slump, household income declined more in the two years after the recession ended than it did during the recession itself, new research has found. Between June 2009, when the recession officially ended, and June 2011, inflation-adjusted median household income fell 6.7 percent, to $49,909, according to a study by two former Census Bureau officials. During the recession -- from December 2007 to June 2009 -- household income fell 3.2 percent. The finding helps explain why Americans’ attitudes toward the economy, the country’s direction and its political leaders have continued to sour even as the economy has been growing. Unhappiness and anger have come to dominate the political scene, including the early stages of the 2012 presidential campaign."
5) The unemployment rate didn't change at all in September, reports Neil Irwin: "The U.S. economy, bruised from a series of blows, looks to be growing slowly anyway, according to new data on the job market. After a steady drumbeat of declining financial markets and worsening fears over Europe’s fortunes, the report is a bit of a respite for the Obama administration. But it also allows Republicans to press their attack on the continued struggles of the economy. The nation added 103,000 jobs in September, the Labor Department said Friday, and added 99,000 more in the previous two months than had earlier been estimated. While nowhere near enough to put the nation’s millions of jobless back to work -- the unemployment rate was unchanged at 9.1 percent -- the fresh data were enough to ease fears of sliding into an outright contraction in the economy. It was merely mediocre, not the horrible result that some economists had feared."
1) Even Wall Street knows they're beyond defense, writes Paul Krugman: "Wall Street’s Masters of the Universe realize, deep down, how morally indefensible their position is. They’re not John Galt; they’re not even Steve Jobs. They’re people who got rich by peddling complex financial schemes that, far from delivering clear benefits to the American people, helped push us into a crisis whose aftereffects continue to blight the lives of tens of millions of their fellow citizens. Yet they have paid no price. Their institutions were bailed out by taxpayers, with few strings attached. They continue to benefit from explicit and implicit federal guarantees -- basically, they’re still in a game of heads they win, tails taxpayers lose...This special treatment can’t bear close scrutiny -- and therefore, as they see it, there must be no close scrutiny. Anyone who points out the obvious, no matter how calmly and moderately, must be demonized and driven from the stage."
2) We need a corporate tax repatriation holiday, writes Douglas Holtz-Eakin: "A repatriation tax policy is desirable from several perspectives. First, cash otherwise trapped overseas -- perhaps even permanently -- would flow back into the U.S. JPMorgan Chase & Co. estimated that at least $1.4 trillion in undistributed foreign earnings is locked up abroad; Moody’s Investors Service warns that U.S. tech companies might hold as much as 79 percent of their cash overseas by 2013. I estimate that the short-run stimulus provided by repatriated dollars would speed the pace of economic recovery, increasing gross domestic product by roughly $360 billion and creating about 2.9 million new jobs.
Second, a reduced tax on repatriated earnings is a step toward a territorial tax system -- one with a permanent zero or very low tax on repatriation. This is exactly the tax system adopted by our international rivals. For the U.S. to remain out of step condemns our best workers and companies to a reduced ability to compete."
3) Elizabeth Warren gives the best case for liberalism, and that's given George Will the heebie-jeebies, writes EJ Dionne: "Well. On the one hand, this is a tour de force. My colleague has brought out his full rhetorical arsenal to beat back a statement that he grants upfront is so obviously true that it cannot be gainsaid. Will knows danger when he sees it. What Warren has done is to make a proper case for liberalism, which does not happen often enough. Liberals believe that the wealthy should pay more in taxes than “the rest of us” because the well-off have benefited the most from our social arrangements. This has nothing to do with treating citizens as if they were cows incapable of self-government. As for the regulatory state, our free and fully competent citizens have long endorsed a role for government in protecting consumers from dangerous products, including tainted beef."
4) Dodd-Frank won't help much if Europe triggers another crisis, writes Simon Johnson: "The resolution authority under Dodd-Frank is purely domestic -- there is no cross-border dimension. This presents a major problem if large financial institutions, which typically have extensive international operations, need to be shut down in an orderly way. U.S. legislation can’t specify how assets and liabilities in other countries will be treated; this requires an intergovernmental agreement of some kind. But no international body -- not the Group of -20, the Group of Eight or anyone else -- shows any indication of taking this on, mostly because governments don’t wish to tie their own hands. In a severe crisis, the interests of the state are usually paramount. No meaningful cross-border resolution framework is even in the cards...It has never been clear that any government agency would be willing to use such resolution powers preemptively -- before losses grow so large that they threaten to rock the macroeconomy."
5) Obama could learn from "Occupy Wall Street", writes Steven Pearlstein: "One reason they’re losing it is that people aren’t sure which side they’re on. And the way to let people know which side you’re on is to send clear signals through what you say and what you do. Columnists and voters aren’t the only ones frustrated by the administration’s mixed signals. So, it turns out, is President Obama. That’s the message I took away from Ron Suskind’s new book on the Obama economic team. As Suskind relates it, time and again the president would come in with a letter or an anecdote or newspaper clipping and ask his advisers, 'Why aren’t we doing this?' And in time what he would get would be explanations of why this wouldn’t work and that can’t be done. A president who ran on the motto of 'Yes We Can' seems to have found himself surrounded by an economic and political team whose motto is 'No We Can’t.'"
Festival interlude: Beirut plays "Postcards From Italy" live.
Got tips, additions, or comments? E-mail me.
Still to come: Investors are getting nervous about Fannie and Freddie's debt; Florida's launching a health exchange even as it fights federal health care reform; Rick Perry has an immigration problem; an administration advisor broke ethics rules promoting Solyndra; and an adorable hamster has some intense dreams.
GOP presidential contenders' economic plans tend toward the vague, reports Michael Fletcher: "The Republican presidential candidates are offering a series of one-size-fits-all economic pitches that fall short of addressing important nuances and competing demands posed by the nation’s diverse fiscal landscape, analysts say...As the candidates seek to harness the economic anxiety eating away at President Obama’s popularity, they have focused on items central to Republican orthodoxy: reducing taxes, cutting government spending, jettisoning regulations and promoting free trade...Factory workers in critical swing states such as Michigan and Ohio have been buoyed by the Obama administration’s auto bailout, which helped reverse the car industry’s long slide. For many of them, the idea of government intervention is a good thing. But many workers in South Carolina think the opposite is true."
Policymakers aren't being decisive enough, writes Richard Thaler: "Along with making people irritable, uncertainty can create paralysis. Some animals freeze when they are frightened. Acting like a deer in the headlights can be a good strategy if you are trying not to be seen, but it can get you run over...Congress certainly suffers from this problem. The country has a long list of roads and bridges that are either dangerous or obsolete. We can begin the inevitable process of rebuilding this infrastructure now, when construction costs are low and borrowing costs are essentially zero, or we can wait. But why wait? Postponing will only make the projects cost more when we finally get around to starting them, and, in the meantime, we risk disaster if one of those bridges fails. Do we think we will no longer need bridges? If Greece defaults, American cars will not suddenly become amphibious."
We probably won't get the same economic silver linings we did during the Depression, writes David Leonhardt: "Underneath the misery of the Great Depression, the United States economy was quietly making enormous strides during the 1930s. Television and nylon stockings were invented. Refrigerators and washing machines turned into mass-market products. Railroads became faster and roads smoother and wider. As the economic historian Alexander J. Field has said, the 1930s constituted 'the most technologically progressive decade of the century.'...It would clearly be nice if we could take some comfort from this bit of history...The most worrisome aspect about our current slump is that it combines obvious short-term problems...with less obvious long-term problems. Those long-term problems include a decade-long slowdown in new-business formation, the stagnation of educational gains and the rapid growth of industries with mixed blessings, including finance and health care."
If "Occupy Wall Street" wants to help the 99%, it should help with their debt, writes Avi Zenilman: "Here's a new idea for 'Occupy Wall Street,' as the demonstrations conclude their third week: the protesters and their allies should set up booths where people can get debt counseling, or help from a foreclosure lawyer (or any lawyer), or assistance in dealing with a health insurance company. It is increasingly clear that the wave of demonstrations across the country stem from a sense that the system isn't working for the '99 percent' -- and that some version of solidarity is vital. There's no reason for people to go it alone, without help, when they are trying work through the bureaucracy and paperwork of banks, health insurance companies, or even government benefits offices. And there's a very good reason to offer such help within the context of broader demands."
Culinary interlude: The women of Parks and Recreation review candy.
Florida is preparing to launch its health exchange even as it fights the Affordable Care Act in court, reports Phil Galewitz: "Florida, which is fighting to overturn the federal health overhaul, is preparing to launch an insurance marketplace early next year that looks like a distant cousin of the ones being created under the federal law...But there are key differences between Florida’s exchange and the type that will be available in 2014 in all states through the federal law: Florida’s exchange is open only to small employers, not individuals. The federal law provides subsidies to help lower-income individuals buy coverage through the exchange, and tax credits to some small businesses that cover their workers. Florida does not. The federal law requires health plans to offer certain 'essential health benefits.' Florida does not. Participation in Florida’s exchange is voluntary for both insurers and small businesses."
Doctors banding together could keep health costs down, writes Arnold Relman: "Traditionally, physicians have practiced either alone or in small partnerships with a single specialty, such as cardiology. Now a big shift to large groups containing many specialties is taking place. These multispecialty practices vary in size, but include physicians in almost all fields. Primary care physicians usually make up almost half the medical staff. They counsel patients and coordinate care by the specialists...Evidence has been accumulating that organized care by multi-specialty groups provides good medical service and has the potential of saving much money. This is because, as most clearly shown by John Wennberg and his colleagues at Dartmouth, much of the care prescribed and provided by independent specialists is unnecessary. Physician-owned not-for-profit groups...are not as likely to provide unnecessary services or to recommend hospitalization when it is optional."
Rick Perry has an immigration problem, reports Perry Bacon: "Rick Perry has an immigration problem. In all three of his appearances in Iowa on Saturday, voters pressed the Texas governor and GOP presidential candidate on the issue, specifically his decision to grant in-state tuition to the children of illegal immigrants. Perry has acknowledged that he made a mistake when he referred to people who opposed his policy as heartless during a debate last month. But he has stood fast on his decision to grant the tuition break in Texas. Responding to voters’ questions here, Perry argued that in Texas, helping the children of illegal immigrants was a way to create 'taxpayers, not tax-wasters.' He assured one questioner that there were 'no free rides' in Texas for the children of illegal immigrants, although the dispute is over whether to grant reduced in-state tuition, not free college, for illegal immigrants."
California is letting undocumented students apply for financial aid, reports Vauhini Vara: "A law passed over the weekend will make California the biggest state to let undocumented immigrants apply for public financial aid for college, making the highest-profile change in policy toward illegal-immigrant youth since the failure of the federal Dream Act last year. Democratic Gov. Jerry Brown signed the California Dream Act into law Saturday, saying it would give 'top students a chance to improve their lives and the lives of all of us.' Despite opposition from Republicans, the bill passed easily in the Democratic-controlled legislature...In 2001, California and Texas became the first of a dozen states to let undocumented students pay resident tuition rates if they met certain requirements. The Texas bill also let undocumented Texans access state financial aid.:
GOP contenders are striking an anti-federal posture on education, reports Trip Gabriel: "Representative Michele Bachmann promises to 'turn out the lights' at the federal Education Department. Gov. Rick Perry calls it unconstitutional. Newt Gingrich, the former House speaker, would allow it to live but only as a drastically shrunken agency that mainly gathers statistics. Even Mitt Romney, who in 2008 ran for president defending No Child Left Behind...now says, 'We need to get the federal government out of education.' For a generation, there has been loose bipartisan agreement in Washington that the federal government has a necessary role to play in the nation’s 13,600 school districts, primarily by using money to compel states to raise standards. But the field of Republican presidential candidates has promised to unwind this legacy, arguing that education responsibilities should devolve to states and local districts, which will do a better job than Washington."
Adorable animals having nightmares interlude: A hamster sleep-fighting.
A DOE advisor pushed Solyndra loans despite a conflict of interest, report Carol Leonnig and Joe Stephens: "The day after a senior Energy Department adviser was told to avoid discussing Solyndra’s application for a $535 million federal loan, he defended the solar company’s reputation in an exchange with a White House aide. Steven J. Spinner, a major fundraiser for President Obama and a Silicon Valley investor tasked with helping the government invest in clean-technology companies, had an ethical conflict: His wife worked for Wilson Sonsini, a California law firm that represented Solyndra, the solar-panel maker, in its applications for the government loan. Even so, on Aug. 19, 2009, Spinner e-mailed an aide to then-Chief of Staff Rahm Emanuel that Solyndra was solid, and he suggested it deserved government support. 'I haven’t heard anything negative on my side,' he responded in the e-mail exchange, proposing that he set up a talk with whomever was raising red flags. 'I . . . have no idea what they’re referring [to].'"
Ethanol politics is tripping up some GOP contenders, reports Richard Oppel: "Even in Iowa, King Corn is not all that it used to be. But can it still make a presidential candidate waffle? Few major presidential aspirants have declared themselves an enemy of corn-based ethanol quite like Gov. Rick Perry of Texas. Three years ago, he unsuccessfully tried to bulldoze a federal law that, in effect, forces billions of bushels of corn to be converted into ethanol and added to gasoline. He argued that this law forced up the price of corn used to feed cattle and chicken, adversely affecting Texas livestock producers...But when Mr. Perry, as a Republican presidential candidate, was asked about the ethanol mandate at an Iowa Corn Growers Association meeting in late August, he ducked the issue and would not answer questions. His evasiveness did not sit well with farmers, but the association’s chief lobbyist, Mindy Larsen Poldberg, was somewhat encouraged."
Closing credits: Wonkbook is compiled and produced with help from Dylan Matthews and Michelle Williams.