“Today we agreed that we must take steps to boost confidence and to promote growth and demand while getting our fiscal houses in order,” said President Obama after the G-8 meeting. “We agreed upon the importance of a strong and cohesive eurozone and affirmed our interest in Greece staying in the eurozone while respecting its commitments.”

G-8 leaders pose for a group portrait with (L-R) Russia's Prime Minister Dmitri Medvedev, Japan's Prime Minister Yoshihiko Noda, Canada's Prime Minister Stephen Harper, French President Francois Hollande, U.S. President Barack Obama, Germany's Chancellor Angela Merkel, Britain's Prime Minister David Cameron and Italy's prime minister Mario Monti at Camp David, Md., May 19. (JASON REED/REUTERS)

The problems in the euro zone have been endlessly, and mistakenly, analogized to the problems in the United States -- and so too have the solutions. We hear that they have focused too much on austerity and assume they need a stimulus package, for instance.

But the reality of the euro zone is they lack the two main mechanisms we used to respond to the 2008 financial crisis. We managed our fiscal policy using Treasury bonds and our monetary policy using a Federal Reserve that judged itself empowered to do whatever was necessary to stop the panic.

Neither option is currently open in Europe. There is no euro-wide bond. So while America sold bonds to help Nevada, in the current situation, Germany, or Finland, or other individual countries would have to sell bonds to help the embattled states. That's a much more politically challenging way to manage transfers. It would be as if the legislatures in New York and Texas had to vote to float debt specifically to help Nevada and Florida.

Similarly, the European Central Bank believes it cannot invest in the debt of individual European countries in order to protect them from runs. So there can't be a plan where, say, Greece drops out, but the ECB says Greece was a special case, and from that moment on, they will buy however many bonds they need to buy to keep bond yields for Spain, Italy, Portugal and Ireland under nine percent.

What the euro zone likely needs, in other words, is not just a different approach, but different institutions. Imagine that, in 2008, the Federal Reserve hadn't thought itself able to intervene to calm financial markets and every rich state had needed to individually float debt to fund the stimulus and you have some idea of the difficulty the euro zone will have solving its problems as its currently composed.

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Top stories

1) Euro zone officials are preparing for a Greek exit. "Europe has begun to prepare for Greece's possible exit from the euro zone ahead of a crucial round of elections in the country next month, which are fast becoming a referendum on its membership in the common currency. Euro-zone officials have started emergency planning to contain the fallout from a Greek exit from the currency bloc, officials said Friday. That includes the preparation of emergency scenarios by staff at the European Commission, the European Central Bank and in national finance ministries, the officials said...European Union Trade Commissioner Karel De Gucht caused a stir Friday when he told a Belgian newspaper that the commission and ECB were 'working on emergency scenarios if Greece does not make it.' It was the first admission by a senior commission official that the EU has contingency plans in place." Brian Blackstone, Matina Stevis, and Stephen Fidler in The Wall Street Journal.

2) The White House is insisting they won't agree to a debt deal without raising taxes. "President Obama and Republican leaders in Congress made history of sorts last year when they agreed to a 10-year plan to reduce annual deficits with spending cuts and no tax increases. Mr. Obama vows not to let it happen again. Both he and Speaker John A. Boehner put down their respective markers this week, suggesting a potential replay of their damaging showdown over the debt ceiling last summer...Mr. Obama, on Wednesday, told him Congress must pass a 'clean' debt-limit increase to cover the nation’s obligations; there will be no more deficit deals, he said, without higher tax revenues from the wealthiest Americans. While the Republicans largely prevailed last year, this time the Obama administration believes it has the greater leverage. The pain of the reductions is being felt as House Republicans advance the annual spending bills; already they have proposed to raise the spending caps for the military, and they are squabbling over domestic programs." Jackie Calmes in The New York Times.

3) Turns out 'reshoring' is real. "Two-thirds of big US manufacturers have moved factories in the past two years, with the most popular destination being the US, according to a survey being released on Monday by Accenture, the consultants. The report provides some of the first industry-wide empirical evidence of 'reshoring,' the trend of jobs once outsourced to low-cost emerging economies being brought back to the US. Although the subject has received much attention, with General Electric the most high-profile example, most of the evidence so far has been isolated and anecdotal...Some 65 per cent of the senior executives questioned by Accenture said they had moved their manufacturing operations in the past 24 months, with two-fifths saying the facilities had been relocated to the US. China was the second destination for relocated factories, with 28 per cent, followed by Mexico with 21 per cent." Hal Weitzman in The Financial Times.

4) Meet the most important bank regulator you've (probably) never heard of. "Daniel Tarullo, the Federal Reserve’s point man on overhauling the financial system, has emerged as the most powerful figure wrestling with the nation’s biggest banks to make them take fewer risks that could endanger the economy. Tarullo, a former Georgetown Law professor and Democratic Party acolyte who was appointed by President Obama to the Fed, is captaining the effort in Washington to make major banks hold more money in emergency reserve...Tarullo has said that the Fed and other regulators failed to effectively regulate the biggest banks before the financial crisis, which erupted in 2008. But as he seeks to avoid repeating that mistake, he is facing fierce resistance from the banking sector -- holding far more in reserve is likely to crimp bank profits and executive pay -- and some skepticism from international officials and even some Fed staff members." Zachary Goldfarb and Brady Dennis in The Washington Post.

@BCAppelbaum: Tarullo on JPM: "Reaffirms importance of making sure our larger institutions have a substantial amount of capital."

5) The American Community Survey is under attack from Republicans. "The American Community Survey may be the most important government function you’ve never heard of, and it’s in trouble. This survey of American households has been around in some form since 1850, either as a longer version of or a richer supplement to the basic decennial census. It tells Americans how poor we are, how rich we are, who is suffering, who is thriving, where people work, what kind of training people need to get jobs, what languages people speak, who uses food stamps, who has access to health care, and so on. It is, more or less, the country’s primary check for determining how well the government is doing -- and in fact what the government will be doing. The survey’s findings help determine how over $400 billion in government funds is distributed each year. But last week, the Republican-led House voted to eliminate the survey altogether, on the grounds that the government should not be butting its nose into Americans’ homes." Catherine Rampell in The New York Times.

@mattyglesias: GOP Rep Daniel Webster bashes the American Community Survey as not "scientific" because it's "random." #failsohard

Top op-eds

1) KRUGMAN: J.P. Morgan proves the need for stronger regulation. "That multibillion-dollar loss wasn’t an isolated event; it was an accident waiting to happen. For even as Mr. Dimon was giving speeches about responsible banking, his own institution was heaping on the risk. 'The unit at the center of JPMorgan’s $2 billion trading loss,' reports The Financial Times, 'has built up positions totaling more than $100 billion in asset-backed securities and structured products -- the complex, risky bonds at the center of the financial crisis in 2008. These holdings are in addition to those in credit derivatives which led to the losses.'...The point, again, is that an institution like JPMorgan -- a too-big-to-fail bank, not to mention a bank whose deposits are already guaranteed by U.S. taxpayers -- shouldn’t be engaged in this kind of speculative investment at all. And that’s why we need a return to much stronger financial regulation, stronger even than the Dodd-Frank regulations passed back in 2010." Paul Krugman in The New York Times.

2) PEARLSTEIN: Wall Street is wasting human capital. "The damage caused by credit default swaps goes beyond the issue of moral hazard and its effect on the cost of borrowed money. This market also ties up hundreds of billions of dollars of the world’s capital -- capital that could otherwise be used to actually finance real businesses that could create wealth and jobs and new products and services. It also represents a massive waste and misallocation of some of the world’s brightest, most skilled workers who are lured in part by the outsize salaries and bonuses that the imperfectly-competitive financial markets now offer. Imagine how much more vibrant and innovative the economy might be if all those Wall Street 'rocket scientists' were actually designing rockets and all those hedge fund traders were channeling their entrepreneurial risk-taking into starting new companies." Steven Pearlstein in The Washington Post.

3) GREEN: Imagine a world without the filibuster. "Let’s take only the Obama presidency. Had the filibuster not applied, the United States would have a market-based system to control carbon emissions, which would limit the damage from global warming, vitalize the clean technology sector, and challenge other large polluters like China and India to do the same. The new health care law would have a public option. Children of undocumented immigrants who served two years in the military or went to college could become US citizens. Women paid less than their male colleagues because of their gender would have broader legal recourse against their employers. Billionaires would not be able to manipulate the political system from behind a veil of anonymity." Joshua Green in The Boston Globe.

4) LAZEAR: Don't fear spending cuts. "Discussion of the so-called fiscal cliff--the combination of tax increases and spending cuts that will come in 2013 if Congress and the president don't act--confuses a number of different issues. The evidence suggests that we should fear the tax hikes, but not necessarily the spending cuts. Anyone who uses the term 'fiscal cliff' accepts a Keynesian view of the economy, knowingly or not. Both tax increases and constrained spending are assumed to be bad for the economy...Raising tax rates hurts the economy directly because tax hikes reduce incentives to invest and because they punish hard work. As such, tax increases slow growth. But budget cuts work in the right direction by making lower tax revenues sustainable. If spending exceeds revenues, then the government must borrow and this commits future governments to raising taxes in order to service the debt...The spending cuts are a positive." Edward Lazear in The Wall Street Journal.

5) EMANUEL: Entitlement programs should have graduated eligibility. "If nothing is done about entitlement spending, and if our current tax breaks continue, then by 2025, tax revenue will be able to pay for Medicare, Medicaid, Social Security, interest on the debt and nothing else. The rest -- defense, medical research, highways, education, energy -- will have to be financed by deficits. Social Security’s funding is predicted to run short in 2033, Medicare’s trust fund in 2024. Like much else in Washington, there is little bipartisan agreement on what to do about it. When it comes to Social Security and Medicare, Republicans emphasize cuts and privatization, while Democrats strongly oppose both approaches...But here is a better bipartisan reform: Graduated eligibility. Instead of having a fixed age at which people can get Social Security and Medicare, we should link the age of eligibility to lifetime wealth. The richer you are, the older you would have to be to be eligible for Social Security and Medicare." Ezekiel Emanuel in The New York Times.

Top long reads

Benjamin Wallace-Wells on George Romney's run for President and what Mitt learned from it: "The matter of what, exactly, happened to George Romney, and what became of the progressive Republican tradition he embodied, has ghosted into the current presidential campaign, in which his own image has been overlaid with that of his son Mitt--taller and less blockily built, but the same jaw, the same hair, the same gestures, the same ringing, pressured manner of speech, caught in a similarly uneasy negotiation with conservatives...The nostalgia for the progressive paternalism of Rockefeller and Romney is deep and sometimes desperate, particularly now, given the conservative grip on Republican politics. One way of viewing the 1968 election, the view that De Vries inclines toward, is as the moment when the conservative faction prevailed over George Romney’s progressivism, so fully converting the party to an individualist view of society that even Romney’s own son now embraces it."

Wonky pop interlude: Hot Chip plays "How Do You Do?" live on Later... with Jools Holland.

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

Still to come: Regulators are sorting out rules for 'crowdfunding'; replacing patents with prizes may reduce the cost of AIDS drugs; the FCC is pushing self-regulation for wireless; a non-binding House vote for Keystone XL; and a family of meerkats enjoy the company of BBC cameramen.


World leaders at the G8 summit emphasized growth. "Leaders of the world’s richest countries banded together on Saturday to press Germany to back more pro-growth policies to halt the deepening debt crisis in Europe, as President Obama for the first time gained widespread support for his argument that Europe, and the United States by extension, cannot afford Chancellor Angela Merkel’s one-size-fits-all approach emphasizing austerity. Pointedly recognizing 'that the right measures are not the same for each of us,' the leaders of the Group of 8 nations, at a meeting hosted by Mr. Obama at Camp David, committed to 'take all necessary steps' to strengthen their economies. They said they wanted to keep Greece in the euro zone and vowed to work to promote growth in Europe, though behind the scenes distinct differences remained over what kinds of stimulus policies to pursue." Helene Cooper in The New York Times.

Regulators are working on new rules for 'crowdfunding' "The passage of the federal Jumpstart Our Business Startups Act earlier this spring will allow entrepreneurs to solicit investments from ordinary people in exchange for a slice of the payout should the company happen to strike it big. But while the shift, called equity-based crowdfunding, should make it easier for fledgling ventures to raise capital, traditional investors are watching with a wary eye to determine how the prospective tsunami of micro-investors could disrupt business as usual...Federal regulators are in the process of crafting guidelines that aim to protect unwitting investors from scams while fulfilling the legislation’s primary goal of giving entrepreneurs greater access to capital...The guidelines that the Securities and Exchange Commission is drafting will determine, at the most granular level, how crowdfunding will be structured, including how much information companies and their investors must disclose." Danielle Douglas and Steven Overly in The Washington Post.

The threat of inflation or deflation has ebbed. "After the financial crisis erupted in 2008, two narratives about inflation dominated economic airwaves and financial-market worry lists. One was that consumer prices would tumble in a replay of Depression-era deflation because the recession was so deep and unemployment so high. The other was that inflation would soar because the Federal Reserve responded so aggressively to the crisis by pumping trillions of dollars into the financial system. It turns out that both sets of predictions were wrong. Consumer prices have neither collapsed nor taken off. When the Labor Department reported last week that the consumer-price index was up 2.3% from a year earlier--very close to the Fed's 2% target--it was a nonevent in financial markets. That tame consumer-price reading is confirmed by low yields in inflation-sensitive bond markets, surveys of households and the recent retreat of commodities prices." Jon Hilsenrath in The Wall Street Journal.

@tylercowen: 1980s U.S. inflation was 4 pct., wasn't so bad, alternative is wrenching deflation and great depression, maybe can't hurt to try.

Supercut interlude: Every time Abed has said "cool."

Health Care

A trove of new data may shed new light on some big healthcare questions. "How much do hospitals and doctors actually charge insurers for their services? How much and which of those services are privately-insured patients using? And, most significantly, what drives changes in health-care use, costs, and total spending? They are among the most vexing questions in American health care. And a recently amassed trove of data from insurance companies could soon shed new light on them. Compiled by the non-profit, non-partisan Health Care Cost Institute, the database will allow researchers to slice and dice more than 3 billion medical claims for more than 33 million individuals in search of answers. The previously confidential information, scrubbed of identifying details, is being provided by three of the nation’s largest insurance companies: Aetna, Humana, and UnitedHealthcare--whose combined customers account for about 20 percent of Americans under age 65 who are insured through an employer." N.C. Aizenman in The Washington Post.

A new bill would replace patents with prizes to reduce the cost of AIDS drugs. "Treating AIDS costs tens of thousands of dollars per patient annually in the United States, and more and more patients are unable to afford the life-saving drugs, according to figures from the AIDS Drug Assistance Program. The waiting list for the program, which is jointly funded by federal and state governments and provides medicines to low-income patients, now stands at 2,759, up from 361 in 2010. Academics have been saying for more than a decade that one way to lower drug costs would be to offer pharmaceutical companies a share of a multi-billion-dollar prize pool, instead of the current system of patents that give a company exclusive rights to newly developed drugs. The notion surfaced in Congress last week at a hearing called by Sen. Bernard Sanders (I-Vt.), who has introduced a bill to establish a prize system for the development of anti-AIDS drugs." Brian Vastag in The Washington Post.

Medicare's quality rating system is under fire. "As the federal government pumps billions of bonus dollars into private Medicare health plans to encourage better care, the quality rating system used to award the bonuses is coming under increasing fire. Critics, including the Government Accountability Office and the Medicare Payment Advisory Commission, question whether the $8 billion-plus program is mostly rewarding mediocre patient quality...Supporters defend the program as part of a broad initiative to boost the quality of patient care and point to demonstrable improvements -- for instance, a San Diego physicians group that discovered 700 Medicare patients with diabetes who were not getting annual eye exams, even though failure to get early treatment can result in blindness...The federal government created the star rating system in 2007 as a guide to help seniors compare the quality of private health plans in the Medicare Advantage program." Marilyn Serafini in The Washington Post.

@afrakt: Fun fact, relative to working-age pop, 65-74 year olds spend 2x on hlth care, 75-84 year olds 4x, and 85+ year olds 6x. http://j.mp/J31qid

The Senate will vote soon on an expansion of the FDA's powers. "The Senate could vote as soon as next week on whether to give the Food and Drug Administration broader regulatory authority, including new powers to prevent prescription-drug shortages, inspect overseas drug facilities and more closely track medical devices for safety flaws. The legislation, which is expected to pass, would renew a broad law that determines how much drug companies and medical-device makers pay the FDA to review their products. Brand-name drug companies are expected to pay about $4 billion in user fees over the five-year law, an increase of about 6% from the current law. Medical-device companies would pay about $600 million over the same period, which is about double the current rate. Under the proposed legislation, the generic drug industry would, for the first time, pitch in about $1.5 billion in user fees to pay for faster product reviews." Thomas Burton in The Wall Street Journal.

Domestic Policy

The FCC is trying a voluntary approach to regulating the wireless industry. "Washington is trying to use the handshake instead of the regulatory hammer when it comes to the booming wireless phone industry. Members of Congress and the Federal Communications Commission have been trying to circumvent the tangle of regulations that tie up traditional land-line service -- and raise costs -- by getting wireless carriers to voluntarily self-regulate on some new issues rather than waiting for legislation or an FCC rule making...Udall was part of a vocal congressional contingent that persuaded the nation’s four largest wireless firms in April to voluntarily create a database of stolen cellphones to help cut theft. That’s just one example of how Washington is trying to avoid the myriad of regulations and rules that have caused decades of legislation and litigation for land-line telephone companies. Other such agreements require wireless companies to notify customers if they’re about to incur big charges. " David Saleh Rauf in Politico.

Some wireless carriers want to to scrap the Telecom Act of 1996. "While the communications field rapidly moves toward a broadband infrastructure, Washington regulators are stuck with antiquated statutes from the days of corded telephones. Pressure is mounting for Congress to define the right role for government in an Internet-based universe -- especially with pending court cases that question the Federal Communications Commission’s authority in this space -- but opinions differ about how to tackle the issue. There is an 800-pound gorilla to contend with: the Telecom Act of 1996. Some wireless carriers argue that public officials must scrap the act, which was the first major reform to communications law since 1934, and start from scratch to craft new rules that make sense given the mobile broadband boom. To others, that line of reasoning is simply a way for the wireless industry to escape communication regulations that should apply regardless of technological protocol." Eliza Krigman in Politico.

Senators are trying to reach a compromise on the farm bill. "With her farm bill now slated for the Senate floor in June, Agriculture Committee Chairwoman Debbie Stabenow is reaching out to Southern lawmakers, trying to heal the breach that split her panel last month and put her at odds with allies in the House. Southern rice and peanut growers are the two primary outliers, and the backroom talks are focused on tailoring some modest countercyclical program as a safety net for these commodities. One option discussed last week would trigger assistance if prices fell below $10.50 per hundredweight for rice and $495 per ton of peanuts. These are the same indexes set in current law and far below what the growers have been asking for, especially in the case of rice. But eager to see Senate movement, House lawmakers sympathetic with the South say the potential deal must be considered as a bridge to a future House-Senate conference on the five-year bill." David Rogers in Politico.

Friendly animals interlude: Meerkats enjoy the company of BBC cameramen.


Natural gas is threatening the viability of carbon capture. "A federal proposal to ban the construction of coal-fired power plants that release all of their carbon dioxide into the atmosphere would seem to smooth the way for carbon capture, a budding technology that traps the greenhouse gas for storage or other uses. But even as the Environmental Protection Agency prepares to open hearings on the proposed rule, unveiled in March, industry experts say the persistently low price of natural gas is threatening the viability of the nation’s carbon capture projects. Natural gas is so cheap and plentiful that utilities have little incentive to build coal-fired plants with the capture technology. And the proposed rule exempts existing coal- and gas-fired plants. In the tiny universe of American carbon capture projects, the first casualty may be the Taylorville Energy Center, a project in the coal fields of Illinois." Matthew Wald in The New York Times.

The House backed Keystone XL in a non-binding vote. "The House went on record Friday to insist that lawmakers negotiating a bicameral transportation programs funding bill include approval of the Keystone XL oil sands pipeline. The non-binding 261-152 vote signals political support for the pipeline in the lower chamber, but fewer Democrats went on record this time as supporting the project in the transportation bill. Twenty-six Democrats voted Friday for Rep. John Barrow’s (D-Ga.) motion to instruct negotiators to uphold the House-approved language that authorizes the pipeline to bring Canadian oil sands crude to Gulf Coast refineries. In April, 69 Democrats supported the House transportation bill -- a tally that GOP leaders have cited when urging inclusion of Keystone in the final House-Senate deal on a transportation package...The 261 backers for Barrow’s motion signal that Keystone supporters don’t have the votes to override a presidential veto." Ben Geman in The Hill.

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