The central policy fight this year has been over taxes. And that fight has been defined by a pledge popularized by an unelected anti-tax activist. For decades, Norquist has been persuading Republicans to swear that they'd never raise taxes. His pledge is tightly constructed, too: It defines raising taxes both as raising tax rates and as eliminating any tax breaks without pumping the money into a tax cut of equal size. And it's worked. It's now an accepted fact that Republicans simply don't vote to raise taxes, and so the question of the year was whether any of them would dare reverse that wholly irresponsible approach to budgeting. Republicans are beginning to defect from Norquist's pledge, but by setting the terms of the debate around such an extreme anti-tax position, Norquist is winning even as he's losing.
Policymaker of the year: Mario Draghi
Over the past three years, the Eurozone debt crisis has been the biggest ongoing threat to the world economy. The crisis that began in Greece and has enveloped Spain and Italy threatened the very existence of the 17 nation currency union. It could have ended five decades of progress toward a united Europe and created a new global financial crisis. Efforts by European officials to deal with it were forever many days late and billions of dollars (or rather, euros) short. Mario Draghi changed that.
Since becoming president of the European Central Bank in November 2011, the Italian has repeatedly fought the challenges facing the Eurozone head-on, and on a scale commensurate to the challenge. He did it first with the "long-term refinancing operation" that pumped more than 1 trillion euros into the continent's banks. He cut the ECB's main target interest rate to an all-time low of 0.75 percent, aiming to combat Europe's recession (his predecessor, Jean-Claude Trichet, had ill-advisedly hiked rates in the spring of 2011). And, most significantly, in September Draghi announced a program to deploy bottomless pools of euros, if necessary, to buy bonds of Eurozone nations to combat a perception that the Eurozone will dissolve. It is the step that has finally, for the time being at least, brought relative stability to a continent that had been dragging down the world economy.
For those achievements, Draghi is Wonkblog's policymaker of the year.
Think tank of the year: The Tax Policy Center
To the untrained eye, that table may not look like much. But to those of us who've been involved in the tax debate this year, we know better. That's a distributional analysis from the Tax Policy Center. That is to say, it's a breakdown of who will pay how much more, or less, under a proposed tax plan, and it's been prepared by the best tax wonks in the business. In a debate rife with partisan misinformation and strategic vagueness, these tables have been a lifeline for those of us trying to figure out what the various tax policies actually mean, and who they'd actually help.
The Tax Policy Center is the cool, nonpartisan, analytical yin to Norquist's hot, ideological, activist yang. The center is directed by Donald Marron, a former Bush appointee, and staffed by a who's who of tax wonks who've served in both parties. They produce the best and most respected tax numbers in town, and they're fearless while doing it. It was their analysis that showed Mitt Romney's tax plan could not possibly fulfill all its stated objectives at the same time, and it's been their work that has made clear the size of the tax increases embedded in the fiscal cliff. Their work has truly been essential over the last year.
Graph of the year: Daily Treasury real yield curve rates
The thing you worry about when you have high deficits is that the market will lose its confidence in your ability to repay your debts. The place you'd see the market losing its confidence is in high interest rates on government debt — that would be a signal that the market is pricing in some risk of default. But all this year, the real yield on three- , five- , seven- and, occasionally, even 20-year government debt has been negative. Negative! The world is so dangerous that the market will literally pay us to keep their money safe.
If any corporation could borrow for less than nothing, they'd see that as the opportunity of a lifetime. We can borrow for less than nothing at a moment when our infrastructure is crumbling and millions are out of work. But instead of taking advantage of this amazing opportunity, we're actually cutting our support to the economy and arguing exclusively about how to reduce our deficits. It's embarrassing.
Book of the year: It's Even Worse Than It Looks
Thomas Mann and Norm Ornstein are probably the most respected scholars of Congress in Washington. For more than 40 years, they’ve been the staunchest advocates, and most respected interpreters, of the institution, tutoring legislators from both parties and serving on an almost endless number of commissions and projects dedicated to understanding and improving what they call “the First Branch.” They’ve even got bipartisan credentials: Mann is at the center-left Brookings Institute, while Ornstein hangs his hat at the conservative American Enterprise Institute. And, at this point, it’s fair to say they’re scared.
In "It's Even Worse Than It Looks: How The American Constitutional System Collided with The New Politics of Extremism," Mann and Ornstein do something very unusual for this town: They leverage the respect and political capital they've spent a lifetime building and use it to try and say exactly what's gone wrong, even if that diagnosis won't be popular in all quarters. “It is, of course, awkward and uncomfortable, even seemingly unprofessional, to attribute a disproportionate share of the blame for dysfunctional politics to one party or the other,” Mann and Ornstein write. But it's also necessary. "Today, however, we have no choice but to acknowledge that the core of the problem lies with the Republican Party," they write, saying what most everyone knows but too few are willing to admit.
Fail of the year: Congress
The 112th Congress is likely to end in ignominy, having pushed the country off the fiscal cliff. But it's not just their final days that disappointed. Here are 14 reasons this was one of the worst congresses ever.
Regulator of the year: Lisa Jackson
Just about everyone has strong feelings about outgoing EPA head Lisa Jackson — in both directions. Greens saw her as the only member of President Obama's Cabinet doing anything about climate change. Industry groups accused her of crippling the economy with regulations. But there's no question she's been hugely significant. This year, the EPA finalized some of the most sweeping curbs on air pollution in two decades and unveiled the first-ever U.S. rules on carbon-dioxide emissions from power plants.
Most promising economic trend: Slower health-care cost growth
Health-care costs started doing something weird recently. They started growing at the same pace as the rest of the economy, rather than outstripping overall economic growth. Health-care costs grew 3.9 percent in 2010 and 2011. In 2013, actuaries at the Center for Medicare and Medicaid Services expect to see health costs grow by 3.8 percent, matching the all-time low set in 2009.
Policy fail of the year: British austerity
When a new coalition government took office in the United Kingdom in May 2010 with big plans to cut the nation's budget deficits, the great hope was that fiscal austerity would be a boon for business and consumer confidence, and that this would offset some of the negative economic consequences of tax hikes and spending cuts. It hasn't been so.
We in the United States may view the roughly 2 percent growth rate of recent years as meager, but the British economy was on track to contract 0.4 percent in 2012, according the IMF. Britain's unemployment rate, at 8 percent, is basically unchanged since mid-2009; the U.S. rate has declined by more than two percentage points in that span. Britain's double-dip or triple-dip recession (depending on how you count) has even meant that the public debt in Britain has kept rising rapidly. It was 66 percent of GDP in 2011-2012, according to the UK's Office of Budget Responsibility, but net debt is set to reach 75 percent of GDP in 2012-2013.
The lesson: In a depressed economy, when the central bank already has interest rates near zero and so cannot easily offset the pain of fiscal austerity, cutting the deficit too soon can be a dangerous thing for an economy.
Most confusing policy metaphor of the year: The fiscal cliff
By itself, the phrase seems to suggest that we're hurtling toward a deficit crisis of epic proportions Dec. 31, putting us in league with Greece or Italy. In fact, the tax hikes and spending cuts that we're facing will do just the opposite: The reason the fiscal cliff would be so crippling to the economy is that it's too much austerity all at once. The misnomer has created a lot of confusion in the past few months, obscuring the fact that legislators have actually been trying to do two things right now: blunt the effect of immediate austerity (the "fiscal cliff") while reducing the long-term deficit more gradually.
White paper of the year: Tax Policy Center's paper on Romney’s tax plan
It seemed too good to be true: a tax plan that slashed everyone's rates without increasing the deficit or raising the tax burden on the middle class. And the Tax Policy Center revealed that it was. The TPC's white paper on Romney's tax plan revealed its central incoherence, showing that it would be impossible to devise a plan that would fulfill all of Romney's stated objectives. Romney and his defenders tried to fire back with competing analyses, but none of them fully refuted the TPC study. In the end, it was a triumph of empiricism over political rhetoric.
Central banker of the year: Charles Evans
Late in 2011, Chicago Fed President Charles Evans, seemingly exasperated that his fellow central bankers were not more fired up about fighting high unemployment at a time of quite low inflation, proposed a novel idea. The Fed (or, by extension, other central banks) could pledge to keep easy money policies in place until either unemployment reached 7 percent or inflation exceeded 3 percent. The idea was to help make growth more likely by signaling the extent of efforts that the Fed might take to ensure a solid recovery, and to end a situation where investors and businesses might expect a rapid onset of tight money the minute the economy starts to grow.
Over the course of 2012, more and more Fed policymakers embraced some version of Evans's idea. They saw appeal in its clarity and its potential to impact expectations of future Fed policy. At their policy meeting that ended Dec. 12, the Federal Open Market Committee said it will keep interest rates low until either unemployment reaches 6.5 percent or inflation is on track to exceed 2.5 percent, only a slight variation from Evans's original idea.
It was Chairman Ben Bernanke who guided the committee toward a consensus on the Evans Rule. And whether it will work to get the U.S. economy out of its rut is still an open question. But for his innovation in central banking, Charles Evans is the central banker of the year.
Rising star central banker of the year: Jeremy Stein
Jeremy Stein has only been a Federal Reserve governor since May 2012, but is rapidly emerging as a thought leader at the central bank. He comes with a first-rate academic pedigree — a PhD in economics from MIT (a program that also produced Ben Bernanke and Mario Draghi), and a professorship at Harvard. And his specialty is the intersection between macroeconomics, financial markets, monetary policy and regulation. In other words, he has spent a career as an academic trying to better understand how the economic and financial systems work — exactly the background needed to be an effective central banker in a post-crisis age, when the importance of financial stability is paramount. Stein's first speeches have been thoughtful expositions of how the unconventional easing efforts undertaken by the Fed and other central banks might work in practice — and the things that limit their effectiveness. If he keeps it up, he could even emerge as a dark horse candidate to succeed Bernanke when his term ends in January 2014, but even if that doesn't happen, he is on track to be a key thinker on the FOMC for years to come.
Academic paper of the year: Michael Woodford, “Methods of Policy Accommodation at the Interest-Rate Lower Bound”
Arguably the most important policy development of 2012 was the Fed’s dramatic move from a wait-and-see posture to aggressive action, culminating in its historic tying of interest rates to the level of unemployment. When the history of that shift is written, a key moment will be the release of this white paper at the annual monetary policy conference in Jackson Hole, Wyo.
At that retreat, Columbia’s Michael Woodford, who by general acclamation is the greatest monetary economist of his generation, entered Ben Bernanke’s home turf and laid out in great detail how he thought Bernanke had fallen short. The Fed shouldn’t just launch periodic asset buys when it senses the economy is weakening, and hope consumers and businesses get the message, Woodford argued. It should send clear messages, with numeric thresholds, about under what conditions it’s going to change course.
That could mean saying interest rates would stay low until unemployment is below 7 percent or inflation about 3 percent, as Chicago Fed chair Charles Evans had suggested, or, even better, it could keep them low until it gets nominal GDP (the product of the economy’s real size and the rate of inflation) back to where it’d be absent the recession. But Bernanke needed to set firm numbers, Woodford said.
So Bernanke did. First he undertook new asset buys — which Woodford judged a “step in the right direction” — and then adopted a version of Evans’s proposal, which Woodford thought was a “substantial improvement.” It would be facile to say that Woodford single-handedly made Bernanke switch course. But he definitely played a role.
Dissenter of the year: Jens Weidmann
The confident-looking man stared out from the cover of Der Spiegel, Germany's biggest newsmagazine. "Aufstand der Bundesbank" the cover text read: Rebellion of the Bundesbank. Jens Weidmann, the president of Germany's central bank, was the lone dissenter on the European Central Bank's governing council to the bold bond-buying program unveiled in September. He is a strong and consistent advocate for Bundesbank orthodoxy: The principles that a central bank must never fund governments by printing money, that allowing any risk of inflation is the road to perdition. To Weidmann's credit, though, even as he has publicly opposed the ECB's actions (and even seemed to compare the actions to a deal with the devil in one speech), the Bundesbank has followed its orders and carried out the policies as instructed by the ECB governing council. It is enough to make Weidmann the dissenter of the year.
Best campaign proposal: Tie the Bush tax cuts’ expiration to unemployment
The trick of the fiscal cliff is figuring out when to raise taxes and cut spending without hurting economic growth. Everyone seems to think 2013 is too early, that the economy is still too weak. But making deals for further in the future just risks setting up future fiscal cliffs. Thankfully, there’s a way out. Senator-elect Angus King, a Maine Independent who’ll caucus with Democrats, proposed tying the expiration of the Bush tax cuts — the biggest single component in the cliff — to the unemployment rate. That way, we could be sure that the change won’t come before the economy can take it.
It’s the kind of no-brainer policy that Congress would adopt all the time if it knew what it was doing. Oh, what a world that would be.
Policy lie of the year: Obama’s “gutting of welfare reform”
Throughout the election, Mitt Romney and Paul Ryan pledged to reverse Obama’s “gutting of welfare reform,” and more specifically his attempt to eliminate the program’s work requirement. The only problem: Obama did no such thing. All he did was allow states to submit proposals for innovative ways that employers and welfare agencies can work together, such as by tacking benefits onto paychecks. It’s perfectly legal and a policy Republicans have pushed for for years. The main effect of Romney and Ryan’s attacks was to misinform Americans about welfare policy and pull at the uglier parts of our collective consciousness.
Sleeper policy issue of the year: Software patents
Nowadays, it seems like Google, Apple, Microsoft and Facebook spend as much time suing each other over patents as they do inventing new products. That's led many frustrated programmers to argue that software patents — which are a relatively recent invention and which often describe vague processes like "one-click shopping" — should be abolished altogether. Federal judge Richard Posner, for one, agrees. So who knows? Maybe Congress will get around to this issue 10 years from now.
Overrated economic indicator of the year: The jobs numbers
At 8:30 a.m. on the first Friday of every month, economics reporters go into a rabid frenzy over the latest data from the Bureau of Labor Statistics. (Yes, we're admittedly guilty of this, too.) The economy only added 96,000 jobs last month? We're dooooomed! The economy added 242,000 jobs last month? Recovery winter is here! One problem: These numbers come with a huge margin of error, and they get revised many times in the following months, often significantly. Let's save the breathless ventilating for the revisions, yes?
Underrated economic indicator of the year: Spanish 10-year bond yields
The euro crisis was one of the biggest economic stories of 2012. And you didn't even need to read the news to follow all the twists and turns. You could just check out the borrowing costs for Spain. Whenever this number approached 7 percent, it meant that Spain's debts were on the verge of becoming unsustainable, which might in turn entail a euro zone implosion and global calamity. All through the year, Europe's leaders kept devising new schemes to push this indicator back down to reasonable levels — and the Mario Draghi bailout plan in September seemed to finally succeed. At least for now ...
Most amusing policy idea of the year: Platinum coins to solve the debt ceiling crisis.
Some economists and legal experts think that President Obama could circumvent the debt ceiling by minting a few platinum coins worth, say, $2 trillion. Is that crazy? Sure. But it's not any crazier than Congress refusing to raise the debt ceiling and hence forbidding the Obama administration from borrowing money to pay for things that Congress has already authorized.
Obscure-yet-important regulatory agency of the year: Basel Committee on Banking Supervision
They gather several times each year in a small Swiss city hard by the borders of Germany and France, in a cylindrical building a few steps from the Basel train station. But the work that global bank regulators do in those meetings will shape the future of global finance and, by extension, the economy.
The Basel Committee on Banking Supervision is creating new global standards for bank capital and liquidity — essentially, to proscribe how much of a buffer the world's largest banks must hold against potential losses. In bank regulation it is particularly important that there be global standards; otherwise, giant banks could locate at whatever nation has the lightest-touch regulation and the entire world financial system would be less stable; it is better for everyone if, for example, America's Citigroup, Britain's Barclays and Germany's Deutsche Bank all face similar regulatory restrictions. Their actions may only rarely make the front pages, but the work done in Basel is crucial to creating a more stable world economy.
Most worthwhile yet hopeless policy crusade of the year: The carbon tax
A carbon tax is an elegant idea in theory. It would force polluters to pay for the damage caused by greenhouse-gas pollution. It would curb our fossil-fuel use and help tackle climate change. And we could even use the revenue from a carbon tax to cut taxes on other things, like income and labor. What's not to like? But alas, even if economists and think tankers love it, this idea's going nowhere in Congress for now — too many Republicans are flatly opposed and Obama won't push it. This is still a dream best left to white papers.
Best election modeler: Sam Wang
Nate Silver gets all the press, but even he admits he got one thing wrong on Election Day. “We missed the North Dakota Senate race," he joked on "The Daily Show," after Jon Stewart asked if he was going to apologize for his predictions. But Princeton neuroscientist Sam Wang — who graduated from Caltech with a physics degree at 19 and does election predictions as a hobby — got that one right. He also got the presidential results for 49 states right, having put Florida as a toss-up, and was astonishingly close to the mark on both the House popular vote (he predicted a perfect tie; Dems edged by 0.6 points) and seat outcome (he predicted Democrats would snag 2 to 22 seats; they got 7).
The fact that Wang, Silver, Huffington Post’s Simon Jackson and Emory’s Drew Linzer all came up with largely the same right predictions is an indication that the polls were not in fact lying this go-around, and a testament to the power of numbers as a method of determining which of two numbers is bigger.
As Election Day neared, Republican commentator Dick Morris stuck with his pretty bold prediction: Mitt Romney would win with a landslide of 325 electoral votes. "It will be the biggest surprise in recent American political history," Morris told Fox News the Sunday before the election. Romney did not, obviously, gain 325 electoral votes. Morris’s prediction, meanwhile, was one of the least accurate that we collected just prior to Election Day.
Best use of graphs: Chris Coons’s remembrance of Kent Conrad
Kent Conrad has borne many titles: senator, deficit hawk, chairman of the Budget Committee. But the retiring North Dakota Democrat may best be remembered on the Senate floor as the Godfather of Charts. Total Outlays vs. Total Revenues, Debt as a percentage of GDP — Conrad insisted on graphing these trends long before anyone else thought it was cool (Wonkblog included). "I don't mind being known as the chart man of the Senate," Conrad said in 2009. "I find charts are an important visual aid that help me simplify the sometimes complex issues we are tackling." Earlier this month, Sen. Chris Coons (D-Del.) paid tribute to his colleague's love for data-visualization — in one chart.
Worst online hosting of economic data: Census Bureau
Suppose you wanted to find out the median income of a given metro region across a given time period — say, the 2000s. Shouldn't be that hard, right? Plenty of people want to see how incomes in New York and Washington have changed over the past 12 years. But to get that info, you need to first navigate the Census’ atrociously designed interactive datafinder, and even then you have to get data year by year and then compile it together. All in all, getting that information took us about an hour and a half, between the site crashing, its confusing navigation structure and the Excel-fu necessary to put the data all together. If the Census presented data the way better agencies like the Bureau of Economic Analysis do, it would have taken five minutes. Thanks, Census.
Most worthwhile Canadian initiative: Mark Carney
Mark Carney is just cleaning up with honors these days. First, Reader’s Digest named him the “Most Trusted Canadian” in the entire country. Then, British officials tapped the very-trustworthy Carney to become the next governor of the Bank of England. Now, we’re giving Carney a wonky for his work as Canada’s central banker. While the rest of the global economy was in free-fall, Canada saw a relatively minor economic downturn. It avoided the big banking crises that played out in the United States and England. For his stewardship of the Great White North, Carney racks up yet another accolade.
Least worthwhile Canadian initiative: The NHL lockout
Canadians are usually known as a polite people, quick to resolve a conflict. That’s not the case with the National Hockey League lockout, which has lead to the cancellation of 625 games. It’s also hit the Canadian economy: As Brad Plumer reported earlier this year, Canadian spending on “arts and entertainment” fell by 2.8 percent in the third quarter. Research on a previous NHL lockout, in 2004, suggested that the cancellation of the entire season shaved 0.1 percent off Canada’s overall GDP.
Most amusing policy/pop culture controversy: Rage Against the Machine rages against Paul Ryan
The controversy began in August, when the New York Times reported that vice presidential hopeful Rep. Paul Ryan’s favorite bands included Rage Against the Machine. That led Rage Against the Machine guitarist Tom Morello to rage against Ryan in a Rolling Stone op-ed. “I wonder what Ryan’s favorite Rage song is?” Morello mused. “Is it the one where we condemn the genocide of Native Americans? The one lambasting American imperialism? .... So many excellent choices to jam out to at Young Republican meetings!”
Most unfortunate YouTube video including a figure from the policy world: Alan Simpson, Gangnam Style
How do you know when a meme has jumped the shark? When it's prompted a retired, octogenarian senator to star in his own parody video of it. The idea was to use the viral video to convince younger Americans to support a new organization of millennial deficit hawks. The Simpson parody caught the media's attention all right, but perhaps not for the reasons that its creators intended.