(Chris Rank/BLOOMBERG)

Let’s back up: QE2 refers to the second round of the inelegantly-named quantitative easing policy, in which the Federal Reserve bought up $600 billion of long-term Treasury debt in order to get private actors to stop buying so much government debt and begin investing in the real economy. But, as James Hamilton argues, they didn’t buy so much of it as to radically change the market for Treasury securities. So insofar as the Federal Reserve’s efforts worked, they had to work in some more indirect way: perhaps by reassuring investors that the Fed remained willing to act if the situation deteriorated.

The story behind QE2 echoes the story behind the stimulus -- and much else that we’ve tried since the financial collapse. In 2007 and 2008, a truly extraordinary event reshaped our economy. But our political system remained much the same. So though various government entities attempted to mount an extraordinary response, our policies, particularly as we got further and further from the collapse of Lehman and more and more used to high unemployment, became quite underpowered when compared to the events they were meant to address. And then, having not done enough to make a major dent in the problem, they become discredited because they’ve failed to make a major dent in the problem, which in turn made it even harder to amp them up to a point where they’d be effective. Doing too little to start, we’ve learned, makes it harder, not easier, to do more later on.

Five in the morning

1) Economists say the Fed’s stimulus was a dud, reports Binyamin Appelbaum: “The Federal Reserve’s experimental effort to spur a recovery by purchasing vast quantities of federal debt has pumped up the stock market, reduced the cost of American exports and allowed companies to borrow money at lower interest rates. But most Americans are not feeling the difference, in part because those benefits have been surprisingly small. The latest estimates from economists, in fact, suggest that the pace of recovery from the global financial crisis has flagged since November, when the Fed started buying $600 billion in Treasury securities to push private dollars into investments that create jobs...A broad range of economists say that the disappointing results show the limits of the central bank’s ability to lift the nation from its economic malaise.”

Krugman’s take: “What we’ve had is a much downsized version of the policy, more than offset by other government actions — a lot like the fiscal stimulus. And we’re supposed to be surprised that it proved disappointing?”

2) The Fed has to decide whether to start tightening up again, report Tom Lauricella and Jon Hilsenrath: “Federal Reserve officials on Wednesday are expected to signal that in June they plan to end their controversial strategy of buying $600 billion in U.S. Treasury bonds to spur the economy. That would mark a milestone in the historic efforts by the central bank to stimulate economic growth. While analysts and investors debate whether the end to the bond-buying effort will have a significant impact on financial markets, the Fed is contemplating when and how to begin draining the credit it pumped into the economy during and after the global financial crisis. That tightening of credit still looks at least several months off, if not longer, and could take a while to unfold.”

If they do decide to tighten, this is how they’ll do it: http://on.wsj.com/hB2QHN

3) The budget fight is bringing us close to class war, writes David Stockman: “Tthe nation’s desperate fiscal condition requires higher taxes on the middle class, not just the richest 2 percent. Likewise, entitlement reform requires means-testing the giant Social Security and Medicare programs, not merely squeezing the far smaller safety net in areas like Medicaid and food stamps. Unfortunately, in proposing tax increases only for the very rich, President Obama has denied the first of these fiscal truths, while Representative Paul D. Ryan, the chairman of the House Budget Committee, has contradicted the second by putting the entire burden of entitlement reform on the poor. The resulting squabble is not only deepening the fiscal stalemate, but also bringing us dangerously close to class war.”

4) If you dig into the numbers, Obama’s debt plan is to the right of Simpson-Bowles, writes, well, me: “Over the next 10 years, Obama cuts $600 billion less from defense and $250 billion less from health care. He raises taxes by $450 billion less, and because Simpson-Bowles includes a Social Security reform while Obama merely calls for Social Security talks, he gets $300 billion from that pot. So of the $1.5 trillion difference, about a trillion dollars come from Obama’s more modest defense cuts and tax increases — both of which are normally understood as liberal priorities — while the remainder is a mix of Social Security and health-care reforms, some of which conservatives like, some of which liberals like.”

5) As Nancy Pelosi starts flying her own colors, Obama is bypassing her, reports Mike Lillis and Bob Cusack: “This year’s budget battles have forged a loose bond between President Obama and Steny Hoyer (D-Md.) while revealing some distance between the White House and Nancy Pelosi (D-Calif.). The informal alliance has propelled the minority whip into the spotlight of the spending debate, bolstered his reputation as a centrist dealmaker and even led some Democrats to suggest he should lead the caucus in the looming talks over raising the nation’s debt limit. Hoyer’s emergence is partly by political chance. With Republicans controlling the House, Obama and Senate Democrats have been forced to the right...The unusual dynamics cater well to Hoyer, a fiscal centrist known for his working relationships with Blue Dogs and GOP leaders.”

Old covering young interlude: R.E.M. plays “Munich” by Editors.

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Still to come: Interest groups are fighting over the debt limit; the battle between Tom Coburn and Grover Norquist is escalating; the Obama administration is losing one of its last liberal economic-policy voices; Steve Pearlstein thinks the U.S. should welcome a falling dollar; states are hitting the limit of how much Medicaid they can cut; regulatory fortunes are changing for anti-union employers; a Senator thinks Obama needs to get even tougher on gas prices; and a swan falls in love with a tractor.


Interest groups are getting in on the debt limit action, reports Jake Sherman: “At least seven entities are now registered to lobby Congress and the Obama administration on legislation that would increase the amount of money the nation can borrow, ranging from trade associations to unions to conservative action groups. The movement to peddle influence on the next big congressional vote shows that special interests are starting to feel like they have a real stake in the outcome of the debt limit -- especially unions and manufacturers. In the first quarter of 2011 -- which ended at the end of March -- the American Federation of State, County and Municipal Employees, Emerson, AARP, the AFL-CIO, Retail Industry Leaders Association, Heritage Action for America and the National Association of Manufacturers were all registered to lobby on the debt ceiling.”

And they’re still fighting over health care and financial reform, reports T.W. Farnham: “According to disclosure reports filed last week with the House and Senate. In the first three months of this year, more than 300 companies, trade associations and lobbying firms were targeting provisions of the financial regulation law, records show. And more than 400 were lobbying on the health-care law, the reports show.”

Grover Norquist and Sen. Tom Coburn’s battle is escalating, reports Glenn Thrush: “Sen. Tom Coburn (R-Okla.), arguably the most prominent fiscal conservative in the Senate, is declaring his independence from one of the country’s leading anti-tax groups, Americans for Tax Reform - and its fiery founder, Grover Norquist. Coburn, a member of the ‘Gang of Six’ bipartisan group working on a deficit reduction plan, said Sunday on NBC’s ‘Meet the Press’ that he’d favor a ‘net’ increase in tax revenue if it didn’t include hiking rates. He’d do so even if didn’t include a dollar-for-dollar match in spending cuts he agreed to when he signed a 2004 pledge to Norquist’s group. ‘Which pledge is most important... the pledge to uphold your oath to the Constitution of the United States or a pledge from a special interest group who claims to speak for all American conservatives when, in fact, they really don’t?’ Coburn asked.”

Jared Bernstein, Biden’s top economist, is leaving, reports Jonathan Weisman: “Jared Bernstein, Vice President Joe Biden‘s economic adviser and one of the longest serving economists in the Obama White House, will leave the administration at the end of the month, a White House official said. Mr. Bernstein, a liberal voice in an increasingly centrist White House, will join the liberal-leaning Center on Budget and Policy Priorities. He is also in advanced talks to be an on-air commentator for Bloomberg News Service’s television network. Mr. Bernstein’s departure comes after the exit of two liberal economic allies, Christina Romer and Larry Summers, and the arrival of deal-making pragmatists like Mr. Summers’ replacement as National Economic Council director, Gene Sperling, and Bruce Reed, Mr. Biden’s new chief of staff who headed the centrist Democratic Leadership Council.”

Mitch McConnell is mulling a replacement for resigning Sen. John Ensign on the Finance Committee, reports Alexander Bolton: “Senate Republican Leader Mitch McConnell (R-Ky.) has a tough decision over whom to appoint for the newly open slot on one of the Senate’s most powerful committee. A Republican spot on the Senate Finance Committee, which has jurisdiction over taxes, Social Security, Medicare and Medicaid, opened Thursday when Sen. John Ensign (R-Nev.) announced his resignation. The resignation becomes effective on May 3. McConnell could pay heed to seniority rankings and appoint Sen. Jim DeMint (R-S.C.), a leader of the Tea Party movement and prominent conservative. Or he could pick Sen. Johnny Isakson (R-Ga.), a well-liked member of the Senate Republican conference who is respected for his pragmatic approach to solving policy problems.”

The Treasury Department netted $17 billion during the financial crisis: http://wapo.st/e73c9V

America needs higher taxes, writes Paul Krugman: “From the tone of much budget discussion, you might think that we were groaning under crushing, unprecedented levels of taxation. The reality is that effective federal tax rates at every level of income have fallen significantly over the past 30 years, especially at the top. And, over all, U.S. taxes are much lower as a percentage of national income than taxes in most other wealthy nations. The point is that we aren’t that heavily taxed, either by historical standards or in comparison with other nations. So if you’re truly horrified by the budget deficit, why not propose tax increases as part of the solution?...That’s why the only major budget proposal out there offering a plausible path to balancing the budget is the one that includes significant tax increases: the ‘People’s Budget’ from the Congressional Progressive Caucus.”

The US should welcome a falling dollar, writes Steven Pearlstein: “Now these macroeconomic imbalances have reached a tipping point. Here in the United States, they are generating intense deflationary pressures that manifest in falling real estate prices, stagnant wages and high unemployment, which require huge amounts of fiscal and monetary stimuli to offset. In Asia, it is the opposite -- strong inflationary pressures are driving up wages, prices and real estate values and other financial assets, requiring increasingly heavy-handed regulation of lending and investment. The practical effect of all this deflation and inflation is to accomplish what a straightforward exchange-rate adjustment would: Raise the relative price of Chinese goods while lowering the price of U.S. goods.”

Meanwhile, in Germany interlude: A German swan falls in love with a tractor.

Health Care

Attempts to cut Medicaid are running up against federal law, reports Sara Murray: “Like nearly every other governor, Maine’s new Republican leader is trying to tame the cost of Medicaid, the state-federal program that provides health insurance to the poor. He just doesn’t know if Washington will let him...States pay, on average, 43% of the tab for Medicaid. Washington pays the rest and, as part of the new health-care law, the federal government restricts states’ ability to save money by narrowing eligibility for the program or charging more for coverage. As a consequence, states like Maine that expanded Medicaid in good times find themselves locked into maintaining those expansions despite big deficits...Both Republican and Democratic governors say Medicaid costs are busting their budgets, and are beseeching Washington to give them more flexibility to cut eligibility and benefits.”

Republicans should resurrect John McCain’s 2008 health care plan, write Ramesh Ponnuru and Yuval Levin: “Unlike wages, employer-provided health benefits are untaxed, giving employees an incentive to get the most expensive coverage available through their jobs. This drives up health care costs, but nobody in politics wants to fix the problem by simply taxing benefits. In his 2008 presidential campaign, Senator John McCain proposed to untangle this knot through an insurance tax credit. Whether they get insurance from their employer or buy it themselves, workers would receive the same credit, creating an incentive to shop around for the cheapest coverage. The proposal has a lot of virtues. Many without employer coverage would be able to get insurance on their own. With coverage less dependent on employment, people wouldn’t worry about losing coverage if they lost or changed their jobs.”

Congress’ desire to please interest groups is the real threat to the Independent Payment Advisory Board, writes Harold Pollack: http://bit.ly/enxcVu

Domestic Policy

A regulator’s lawsuit against Boeing signals pro-union actions to come, reports Steven Greenhouse: “For businesses, it was the type of action they have feared from a National Labor Relations Board dominated by Democrats. For labor unions, it was the type of action they have hoped for. And for both, it may be a sign of things to come. These fears and hopes were stirred this week when the labor board’s top lawyer filed a case against Boeing, seeking to force it to move airplane production from a nonunion plant in South Carolina to a unionized one in Washington State. Boeing executives had publicly said they were making the move to avoid the kind of strikes the airplane maker had repeatedly faced in Washington; Lafe Solomon, the labor board’s acting general counsel, said the company’s motive constituted illegal retaliation against workers for exercising their right to strike.”

Markets just don’t work in education, writes Randi Weingarten: “Market-based reformers advocate using student test scores to evaluate and compensate teachers, increasing the number of charter schools, firing teachers in low-performing schools, and relying on corporate executives and business practices to run school districts. This ideological approach has generated a great deal of media attention, and it has been sold aggressively by its advocates. But there is increasing evidence it doesn’t work. A 2009 Stanford University study found 17% of charter schools provide a superior education to that which students receive in traditional public schools, but that nearly half of charter schools have results that are no better than neighborhood schools. Over a third deliver results that are worse.”

Happy Easter interlude: Two kids are terrified by the Easter Bunny.


Sen. Richard Blumenthal wants a grand jury to investigate high gas prices, reports Ben Geman: “Sen. Richard Blumenthal (D-Conn.) on Sunday called for an aggressive federal probe - including a possible grand jury - into whether rising gasoline prices stem from illegal manipulation of energy markets. President Obama and the Justice Department last week announced a multi-agency task force to explore whether there is price manipulation or fraud afoot, and the role of speculative trading in energy futures. Blumenthal, Connecticut’s former attorney general, said on CBS’ ‘Face the Nation’ that federal officials need to play hardball...’The Justice Department should take the lead, seize this moment and send a message, a very strong deterrent message that this country will not tolerate the kind of illegal speculation and trading and hedge fund activity that may be driving prices up,’ he added.”

China’s high-speed rail efforts have gone off the tracks, reports Keith Richburg:China’s expanding network of ultramodern high-speed trains has come under growing scrutiny here over costs and because of concerns that builders ignored safety standards in the quest to build faster trains in record time. The trains, a symbol of the country’s rapid development, have drawn praise from President Obama. But what began in February with the firing and detention of the country’s top railway official has spiraled into a corruption investigation that has raised questions about the project’s future. Last week, the new leadership at the Railways Ministry announced that to enhance safety, the top speed of all trains was being decreased from about 218 mph to 186. Without elaborating, the ministry called the safety situation ‘severe’ and said it was launching safety checks along the entire network of tracks.”

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