The Washington Post

Wonkbook: What the Fed got wrong

The U.S. Federal Reserve building stands in Washington March 31. (Joshua Roberts/BLOOMBERG)

As Binyamin Appelbaum writes today, "a number of studies have concluded that the Fed’s efforts have had only a modest impact on the economy." And that's not a modest impact on a normal economy. It's a modest impact on the worst economy since the Great Depression. The anger at the Fed isn't coming because people have suddenly developed strong and nuanced views on quantitative easing. It's coming because people are angry about the state of the economy, and the Fed is one of the major forces in the economy. The way to have avoided it wouldn't have been to do less, but to do better, which would've meant doing more.

A growing number of economic policymakers -- former Fed vice chairman Alan Blinder, former CEA chair Christina Romer, former associate director for the Fed's monetary affairs division Joseph Gagnon -- believe that would've been, and in many cases, still is, possible. They argue that the bank's underwhelming impact on the recovery is evidence not of the Fed's inability to more effectively fight the recession, but its unwillingness to do what was needed to fight the recession. Larger and more aggressive asset purchases, price-level targeting, and various other dips into unconventional measures were and are needed. But all that would've been economically more effective and politically easier a year ago, or even two years ago, than it is today. Today, the Fed is under intense criticism, which limits its freedom of action. Having not done enough, they're now unable to do more.

Five in the morning

1) The National Labor Relations Board has proposed the biggest changes in union elections since the Truman administration, report Melanie Trottman and Kris Maher: "The National Labor Relations Board Tuesday proposed the most sweeping changes to the federal rules governing union organizing elections since 1947, giving a boost to unions that have long called for the agency to give employers less time to fight representation votes. The NLRB's proposals would likely compress the time between a formal call for a vote by workers on whether to join a union, and the election itself. It is the latest in a series of actions by the board and other agencies controlled by Obama administration appointees that respond to labor leaders' calls for more union friendly federal labor policies."

2) The House GOP is rejecting Mitch McConnell's suggestion of a short-term debt limit hike, report Janet Hook and Corey Boles: "Two top House Republicans rejected the idea of pursuing a series of piecemeal deficit-cutting agreements in exchange for gradual increases in the government's borrowing limit, putting more pressure on negotiators to start cutting deals on a broader package within days...Senate Minority Leader Mitch McConnell (R., Ky.) said Sunday that if lawmakers did not soon reach a broad budget agreement, they might have to agree to a smaller increase in the debt ceiling and revisit the issue again in a few months. But House Majority Leader Eric Cantor (R., Va.) told reporters Tuesday he didn't 'see how multiple votes on a debt-ceiling increase can help us get to where we want to go,' a sentiment echoed by House Ways and Means Committee Chairman David Camp (R., Mich.)."

3) The GOP field is overwhelmingly critical of the Fed, reports Jon Hilsenrath: "The Federal Reserve, already under fire from Congress and finance officials around the world, is now coming under sustained attack by Republican presidential candidates. In the latest salvo, former House Speaker Newt Gingrich is expected to call Wednesday in Atlanta for a 'dramatically limited Federal Reserve.' In the text of his comments released in advance, he criticizes the U.S. central bank for not staying focused on the strength of the dollar and for lending money to subsidiaries of foreign banks during the financial crisis...Tim Pawlenty, a former Minnesota governor, has called for Fed Chairman Ben Bernanke to step down...Michele Bachmann...has attacked the Fed for weakening the value of the dollar and has supported a proposal by fellow candidate Rep. Ron Paul (R., Texas) to subject the Fed to outside audits."

4) The Fed's policies over the past three years weren't as effective as hoped, writes Binyamin Appelbaum: "The Federal Reserve hoped that its three-year-old economic rescue campaign would reach a climax at the end of June. It hoped that consumers and businesses by now would be spending more and more, and the central bank could start doing less and less...The pace of economic expansion has repeatedly fallen short of the Fed’s predictions, and the central bank is expected to lower its eyes once again when its releases a new forecast after a two-day meeting of its policy board, the Federal Open Market Committee. Economic forecasters, many of whom also thought 2011 would be a more prosperous year, say that they underestimated the impact of the Japanese earthquake on the production of cars and other goods. They also point to a lack of confidence."

5) You can't balance the budget responsibly through discretionary spending cuts, writes David Leonhardt: "Eventually, the country will have to confront the deficit we have, rather than the deficit we imagine. The one we imagine is a deficit caused by waste, fraud, abuse, foreign aid, oil industry subsidies and vague out-of-control spending. The one we have is caused by the world’s highest health costs (by far), the world’s largest military (by far), a Social Security program built when most people died by 70 -- and to pay for it all, the lowest tax rates in decades. To put it in budgetary terms, the deficit we imagine comes largely from discretionary spending. The one we have comes partly from discretionary spending but mostly from everything else: tax rates, Medicare, Medicaid and Social Security."

'80s rock interlude: Surfer Blood and Sarah Baldwin cover "Gigantic" by the Pixies.

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

Still to come: Greek looks set to receive a bailout; Republicans have turned on the Federal Reserve; health insurers have figured out a way around one of health reform's key rules; Steve Pearlstein sees a lot of health-care hypocrisy; the AARP wants Social Security out of the current debt talks; ethanol's lost a number of champions in Congress; and a cat who really likes heavy metal.


The debt debate is increasing opposition to the war in Afghanistan, reports Helene Cooper: "As Mr. Obama begins trying to untangle the country from its military and civilian promises in Afghanistan, his critics and allies alike are drawing a direct line between what is not being spent to bolster the sagging economy in America to what is being spent in Afghanistan — $120 billion this year alone. On Monday, the United States Conference of Mayors made that connection explicitly, saying that American taxes should be paying for bridges in Baltimore and Kansas City, not in Baghdad and Kandahar."

Greece looks set for a bailout, reports Howard Schneider: "Greek Prime Minister George Papandreou on Tuesday won a critical vote of confidence in Parliament, helping pave the way for $17 billion in emergency loans needed to keep his beleaguered country solvent. Papandreou’s governing socialist party holds a slim 155-seat majority in the 300-member assembly, and public anger has been mounting over the country’s ongoing recession and the deep cuts to social programs demanded by the International Monetary Fund and other European countries as a condition for the emergency loans. But after a cabinet reshuffle last week -- and with the Greek government otherwise facing an imminent financing crisis and possible default on its bond payments -- Papandreou prevailed in a party-line vote, 155 to 143, with two abstentions, even as thousands of protesters booed outside."

A small business lending program hasn't given out a dime, reports Josh Boak: "Nearly nine months after its formation, a $30 billion government fund to foster small-business lending has yet to pay out a single dime, even as the nation struggles with traumatic levels of unemployment. Now, Rep. Sam Graves (R-Mo.) wants an explanation. And as chairman of the Small Business Committee, he hopes his sole witness at a hearing Wednesday -- Treasury Secretary Timothy Geithner -- can shed some light on the holdup...As of this week, 844 institutions have applied for $11.6 billion from the Small Business Lending Fund. In theory, money from the fund would free up capital so that banks could then grant more loans to companies looking to buy new equipment and hire more workers."

Mitt Romney is going hard against Dodd-Frank, reports Philip Rucker: "As he tries to persuade Republicans that he can jump-start the nation’s beleaguered job market, Mitt Romney is sharpening his attack on last year’s overhaul of financial industry regulations. The GOP presidential front-runner continues to deliver his now-familiar assault on President Obama’s economic record. But the 2010 Dodd-Frank bill that tightened federal regulations on Wall Street has emerged as a key element of Romney’s evolving stump speech. In a short address to more than 250 supporters at a restaurant in this Denver suburb on Monday, and again in a roundtable talk that followed with a dozen small business owners, Romney said the Democratic-led overhaul has created 'uncertainty' that paralyzes Main Street."

Adorable animals who think they're people interlude: A chihuahua dances flamenco.

Health Care

Health insurers have figured a way out of medical loss ratio requirements, writes Chris Gay: "A key provision of the Patient Protection and Affordable Care Act forces insurance companies to devote more of the premiums they collect from customers to actual clinical care...The industry has a special term for the amount of money it spends on patient care and not on administrative costs or stockholder dividends: 'medical loss ratio.'...Insurers don’t need waivers to get out of spending money on patient care...Insurers simply reclassify some expenses as clinical care in order to meet the minimum ratio. The Affordable Care Act opened the door for this sidestep by creating an expense category called 'quality-improving activities' that count as clinical spending...Depending on who’s counting, the shift could boost the ratio by as many as seven percentage points."

New health care technology could expand the rich-poor life expectancy gap, writes Peter Orszag: "New technologies allow us to collect our own health data and store it in an online record. When combined with information from doctors and other providers, it can present a picture of someone’s well-being more nuanced than anything available before...The new technologies may widen gaps in life expectancy. Americans are living longer than ever -- but, as documented in a recent National Academy of Sciences report...people with more education and income are enjoying much more rapid increases in longevity than others are...If the new personalized health technologies wind up being used disproportionately by people with more education and income, driving that group toward even better health, they will probably cause the gap in life expectancy to widen still further."

Both parties are guilty of health care hypocrisy, writes Steven Pearlstein: "Unless you’re trained as a lawyer or a Talmudic scholar, it’s hard to see a practical, moral or constitutional distinction between Obamacare (requiring every American to buy health insurance from a regulated exchange or face a tax) and Ryancare (requiring every American to pay a Medicare payroll tax so they can buy health insurance from a regulated exchange at age 65). Both involve an individual mandate...Democrats have been equally hysterical in attacking Ryancare as a throw-Grandma-under-the-bus scheme to balance the budget, even as they proudly defend the health reform law for everyone else. Never mind...that under the health reform law and both the Ryan and Obama 2012 budget plans, a cap would be set on the annual growth in per beneficiary spending under Medicare."

Domestic Policy

The AARP doesn't want Social Security in the debt limit debate, reports Arthur Delaney: "The Wall Street Journal reported Friday that AARP 'is dropping its longstanding opposition to cutting Social Security benefits.'...'We had a pretty big concern that Wall Street Journal article came out at the time it did,' AARP legislative policy director David Certner told HuffPost on Tuesday. 'The fact that they dropped it at this time gave the suggestion we were somehow open to having Social Security as part of this deficit debate.' While AARP says it is adamantly opposed to having Social Security in the debt ceiling discussion, the group is open to separate negotiations on changes in things like the retirement age or the formula for calculating benefits to maintain the long-term solvency of the Social Security trust fund."

Jo Anderson is the administration's secret weapon with teachers' unions, reports Abby Phillip: "Education Secretary Arne Duncan’s willingness to publicly pressure teachers unions to 'change and evolve' has sometimes strained relations with a key Democratic constituency. One reason the administration has avoided a major rift with teachers unions is a little-known adviser named Jo Anderson. A former executive director of Illinois’s largest education union, Anderson, 66, is described by some union leaders as labor’s 'man on the inside.' As Duncan’s senior adviser, he fills a vital role at the Department of Education: chief liaison to the nation’s education unions. More than two years into the Obama administration, there has been plenty of cause for conflict with teachers unions, which play a critical role in Democratic voter turnout during election years."

Wal-Mart's real problem is its authoritarian corporate culture, writes Nelson Lichtenstein: "There are tens of thousands of experienced Wal-Mart women who would like to be promoted to the first managerial rung, salaried assistant store manager. But Wal-Mart makes it impossible for many of them to take that post, because its ruthless management style structures the job itself as one that most women...would find difficult to accept. Why? Because, for all the change that has swept over the company, at the store level there is still a fair amount of the old communal sociability. Recognizing that workers steeped in that culture make poor candidates for assistant managers, who are the front lines in enforcing labor discipline, Wal-Mart insists that almost all workers promoted to the managerial ranks move to a new store, often hundreds of miles away."

Adorable animals who think they're people interlude II: A cat rocks out to a Slayer concert.


Ethanol has fewer champions in Congress than it once did, reports Darren Goode: "After major losses in the House and Senate last week, the ethanol industry is missing the influence of those pro-ethanol congressional leaders. Hastert...used his influence as House speaker to ensure the Energy Policy Act of 2005 included a crucial renewable fuels mandate...Also gone are former Senate GOP leader Bob Dole of Kansas and former Senate Democratic leader Tom Daschle of South Dakota. 'You’ve had key House members and key senators in key places that could either begin the programs or protect them,' Rep. Joe Barton (R-Texas) told POLITICO last week. 'That’s no longer the case overall. John Boehner, Eric Cantor are not corn-state people,' Barton added. 'Harry Reid, Mitch McConnell. So you get down to the committee chairmen and ranking members, they’re just not in a stronger position.'"

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


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