All eyes on Europe
Ezra Klein's Wonkbook
Karl Singer is writing Wonkbook this week while Ezra is on vacation.
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Top story: All eyes on Europe
Germany and France backed Draghi’s pledge to protect the euro. “The leaders of Germany and France threw their weight behind European Central Bank President Mario Draghi’s pledge to protect the euro with decisive action, delivering a crucial political endorsement for the ECB’s use of its printing press to buy beleaguered nations’ bonds. The remarks, from German Chancellor Angela Merkel, French President Francois Hollande and others, helped propel a broad market rally that began Thursday after Mr. Draghi’s declaration. Ms. Merkel and Mr. Hollande held a phone conference Friday and released a statement saying they are ‘deeply committed’ to the euro zone and ‘determined to do everything to protect it.’ In a reference that seemed to endorse Mr. Draghi’s remarks, the leaders said euro-zone member states and European institutions must live up to their responsibilities in their areas of competence.” Brian Blackstone and Charles Forelle in The Wall Street Journal.
But the Bundesbank remains opposed to ECB bond purchases. “Germany's powerful Bundesbank issued a reminder that it still opposed sovereign bond purchases by the European Central Bank, dampening market optimism after ECB president Mario Draghi hinted he could act more decisively in the eurozone debt crisis. Senior officials at the German central bank have long been critical of using ECB resources to buy the bonds of struggling countries such as Greece or Spain. The Bundesbank believes that this is against the spirit of the ECB's statutes, which forbid it to finance states. ‘There haven't been any changes’ in this position, the bank said on Friday.” James Wilson in The Financial Times.
@tylercowen: At what point does bad monetary policy explain mostly the level and not so much the rate of growth?
The ECB is unlikely to act at its Thursday meeting. “Comments from Mario Draghi, president of the European Central Bank, have left markets, and some eurozone governments, hopeful that the central bank will provide more help. Yields on Spanish and Italian debt fell last week after Mr Draghi signalled the ECB would buy more government bonds. But those expecting action as early as Thursday's governing council meeting could be disappointed. The ECB will want to see more from governments, perhaps purchases of sovereign debt by the European Financial Stability Facility, the eurozone's temporary rescue fund, and a stronger commitment from Madrid to tackle its twin banking and economic crises, before it steps in…Among the ECB's other options, a game changer would be for the central bank to grant the European Stability Mechanism, the bloc's firewall, a banking licence.” Claire Jones in The Financial Times.
What action will the ECB take? http://on.wsj.com/Oe3jvL.
September looks like a make or break month for the euro. “Over the past couple of years, Europe has muddled through a long series of crunch moments in its debt crisis, but this September is shaping up as a ‘make-or-break’ month as policymakers run desperately short of options to save the common currency. Crisis or no crisis, many European policymakers will take their summer holidays in August. When they return, a number of crucial events, decisions and deadlines will be waiting…In that month a German court makes a ruling that could neuter the new euro zone rescue fund, the anti-bailout Dutch vote in elections just as Greece tries to renegotiate its financial lifeline, and decisions need to be made on whether taxpayers suffer huge losses on state loans to Athens. On top of that, the euro zone has to figure out how to help its next wobbling dominoes, Spain and Italy – or what do if one or both were to topple.” Jan Strupczewski in Reuters.
Finland and Portugal’s divergent outlooks reflect the eurozone divide. “Though Finland and Portugal share a currency, their divergent economic outlooks reflect the divide between the euro-zone’s strongest and weakest members. Finland’s economy is still growing, and unemployment is low. In contrast, Portugal is suffering a high jobless rate and entering a second year of recession…Meanwhile, interviews with Portuguese and Finnish during summer holidays in both countries reveal starkly different views of life amid the euro-debt turmoil. ‘We haven’t felt the crisis,’ says Pentti Risto Ahonen, a retired dentist from Jyvaskyla, Finland, who spends half of the year in the Algarve with his wife, Leena-Maija…For Portuguese families though, the crisis is front and center. Felipe Felipe, a 38-year-old banker from the city of Barreiro, south of Lisbon, says his family has been cutting expenses to make up for the higher taxes he is paying after Portugal put through an austerity program.” Patricia Kowsmann and Denise Wall in The Wall Street Journal.
Greece faces a EUR30 billion shortfall. “Greece’s chronic recession and the receding hope of an economic recovery in the next two years have blown a hole of at least 30 billion euros ($36.85 billion) in its financial rescue plan, officials familiar with the situation said. The officials argued that the findings indicate a need for official creditors to write down their claims by at least that amount if they want to keep Greece in the euro zone, as well as finding new money to fund the country for longer. The officials represented two of four parties to the talks: the Greek government and the ‘troika’ of the European Union, European Central Bank and International Monetary Fund.” Costas Paris in The Wall Street Journal.
KRUGMAN: It’s still unclear if Draghi is willing to save the euro. “What could turn this dangerous situation around? The answer is fairly clear: policy makers would have to (a) do something to bring southern Europe's borrowing costs down and (b) give Europe's debtors the same kind of opportunity to export their way out of trouble that Germany received during the good years — that is, create a boom in Germany that mirrors the boom in southern Europe between 1999 and 2007. (And yes, that would mean a temporary rise in German inflation.) The trouble is that Europe's policy makers seem reluctant to do (a) and completely unwilling to do (b). In his remarks, Mr. Draghi — who I suspect understands all of this — basically floated the idea of having the central bank buy lots of southern European bonds to bring those borrowing costs down. But over the next two days German officials appeared to throw cold water on that idea. In principle, Mr. Draghi could just overrule German objections, but would he really be willing to do that?” Paul Krugman in The New York Times.
FELDSTEIN: The ECB shouldn’t focus debt purchases on countries with high interest rates. “While any central bank must be able to conduct open-market operations to manage liquidity in financial markets, selective purchases of individual country bonds that bear high interest rates because of current and past fiscal profligacy is both unnecessary and dangerous. A better rule for the ECB would be to conduct open-market operations by buying and selling a ‘neutral basket’ of sovereign bonds, with each country's share in the basket determined by its share in the ECB's capital. This ‘neutral basket’ approach would permit the ECB to purchase substantial volumes of Italian and Spanish bonds, but only if it was also buying even larger amounts of French and German bonds.” Martin Feldstein in Project Syndicate.
ZINGALES: The euro’s founding fathers are to blame for the crisis. “The euro crisis isn't Angela Merkel's fault. The real culprits are the founding fathers — Francois Mitterrand, Helmut Kohl, Jacques Delors or Romano Prodi — who created a common currency based on poor economics and worse politics. They knew their brainchild was flawed, and bet that future crises would force it to evolve. Unfortunately, they willfully ignored the dysfunction of Europe's political structures, which allow Luxembourg, a country with fewer inhabitants than Tucson, Arizona, to veto any communal decision. As the impending default of the Spanish regions amply demonstrates, a fiscal union without a transfer of political powers to a central authority is pure folly.” Luigi Zingales in Bloomberg.
ISSING: A European political union is a foolish idea. “Political union is impossible to achieve within a few years. It cannot be a means of crisis management. And here comes the dangerous part: any proposals, for example, to extend the amount and scope of financial support mechanisms premised on further integration in the future. Promising later action against requests for more money now does not look like a credible strategy – quite the opposite. This approach would severely undermine the idea of establishing political union…Political union is not the solution. All measures that implicitly pre-empt the establishment of political union are inconsistent and dangerous. They imply huge financial risks for a few member countries and could not only undermine honest efforts in the direction of political union, but also destroy the fundament on which such a process finally rests, namely the identification of the people with the European idea.” Otmar Issing in The Financial Times.
1) PEARLSTEIN: Glass-Steagall didn’t cause the financial crisis. “Any number of factors led to the recent financial crisis. At the top of the list — and rarely mentioned — is the willingness of our trading partners to finance our trade deficit with an artificially low interest rate and an artificially high exchange rate. And right behind it was the growth of a vast new shadow banking system largely outside the reach of regulators. Shoddy lenders, foolish borrowers and investors, greedy investment bankers, compromised appraisers and ratings analysts, clueless regulators — all of these were also part of the story — along with excessive consolidation. I suppose even a screenwriter as gifted as Sorkin would find it impossible to boil all that down to a secondary storyline for his ripped-from-the-headlines TV drama. The problem with his pinning the blame on the repeal of Glass-Steagall, however, is that millions more Americans now believe it to be true.” Steven Pearlstein in The Washington Post.
2) EDELMAN: We need more well-paying jobs to get people out of poverty. “The first thing needed if we're to get people out of poverty is more jobs that pay decent wages. There aren't enough of these in our current economy. The need for good jobs extends far beyond the current crisis; we'll need a full-employment policy and a bigger investment in 21st-century education and skill development strategies if we're to have any hope of breaking out of the current economic malaise. This isn't a problem specific to the current moment. We've been drowning in a flood of low-wage jobs for the last 40 years. Most of the income of people in poverty comes from work. According to the most recent data available from the Census Bureau, 104 million people — a third of the population — have annual incomes below twice the poverty line, less than $38,000 for a family of three.” Peter Edelman in The New York Times.
3) COCHRANE: We can achieve price-level stability without a gold standard. “A gold standard is ultimately a commitment to exchange each dollar for something real. An inflation-indexed bond also has a constant, real value. If the Consumer Price Index (CPI) rises to 120 from 100, the bond pays 20% more, so your real purchasing power is protected. In place of gold, the Fed or the Treasury could freely buy and sell such inflation-linked securities at fixed prices. This policy would protect against deflation as well as inflation, automatically providing more money when there is a true demand for it, as in the financial crisis. The Fed currently interprets ‘price stability’ to mean 2% inflation forever. A CPI standard could enforce 2% inflation. But why not establish a price-level target instead? The CPI could be the same 30 years from now as it is today, and long-term contracts could carry no inflation risk.” John Cochrane in The Wall Street Journal.
4) SHILLER: Tax increases should come with increased support of philanthropy. “We need to accompany any tax increases with an affirmation and a broadening of the tax system's support of philanthropy. After a big tax increase on high incomes, people should have an especially strong incentive to give money to good causes: to the needy and to schools, colleges, hospitals, churches, the arts and other purposes. Many such donations reduce the need for government spending, so the deduction isn't terribly costly to the government. It is also likely to bring entrepreneurial creativity to such causes.” Robert Shiller in The New York Times.
5) MULLER: The conversion of a climate change skeptic. “Call me a converted skeptic. Three years ago I identified problems in previous climate studies that, in my mind, threw doubt on the very existence of global warming. Last year, following an intensive research effort involving a dozen scientists, I concluded that global warming was real and that the prior estimates of the rate of warming were correct. I'm now going a step further: Humans are almost entirely the cause. My total turnaround, in such a short time, is the result of careful and objective analysis by the Berkeley Earth Surface Temperature project, which I founded with my daughter Elizabeth. Our results show that the average temperature of the earth's land has risen by two and a half degrees Fahrenheit over the past 250 years, including an increase of one and a half degrees over the most recent 50 years. Moreover, it appears likely that essentially all of this increase results from the human emission of greenhouse gases.” Richard Muller in The New York Times.
Top long reads
Ryan Lizza chronicles how Paul Ryan captured the G.O.P.:“One day in March, 2009, two months after the Inauguration of President Obama, Representative Paul Ryan, of Wisconsin, sat behind a small table in a cramped meeting space in his Capitol Hill office. Hunched forward in his chair, he rattled off well-rehearsed critiques of the new President's policies and America's lurch toward a ‘European’ style of government. Ryan's father, grandfather, and great-grandfather all died before their sixtieth birthdays, so Ryan, who is now forty-two, could be forgiven if he seemed like a man in a hurry. Tall and wiry, with a puff of wavy dark hair, he is nearly as well known in Washington for his punishing early-morning workouts as he is for his mastery of the federal budget. Asked to explain his opposition to Obama's newly released budget, he replied, ‘I don't have that much time.’”
Lyndsey Layton on John Danner’s quest to build the largest charter school chain in the nation:“Inside a prefabricated beige building hard by the freight tracks, John Danner thinks he has solved one of the nation's most vexing problems. This is Rocketship Discovery Prep, one of five charter elementary schools founded by Danner that are bridging the achievement gap — the staggering difference in academic performance between poor and privileged children…On standardized tests, Rocketship students — overwhelmingly poor, Latino and Spanish-speaking — have outscored the county and state average. In some cases, the ‘Rocketeers’ have performed as well as students in nearby Palo Alto public schools, where Stanford University professors send their children. Danner wants to take his model and expand it into the nation's largest chain of charter schools, reaching 50 cities by 2020.”
Lori Montgomery profiles Rep. Dave Camp’s push for tax reform:“Earlier this year, as House Republicans began strategizing for the November elections, conservatives badgered their leaders to unveil a detailed plan to overhaul the U.S. tax code. The GOP has vowed to lop 10 points off the top tax rate, and many House freshmen were eager to make that promise a centerpiece of their first reelection campaigns. It fell to Rep. Dave Camp (R-Mich.) to convince them that tax reform, like so many things in Washington, is more complicated than it might seem. In a series of meetings, the chairman of the tax-writing House Ways and Means Committee gently explained that lowering rates would explode the budget deficit unless Republicans also proposed pruning back expensive credits and deductions that benefit millions of ordinary people. The break for home mortgage interest, for example, or the $1,000 child credit. Or that stalwart of GOP orthodoxy, the 15 percent rate for capital gains.”
Steven Mufson on Keystone XL and the fight over property rights:“He worries that it could take years for the land to recover. And the pipeline, buried four or five feet deep, will be sitting in water, the same water that is part of the vast Ogallala aquifer and which lies so close to the surface that his pasture does not need to be irrigated. He worries that a spill or leak will spread because the soil is so porous. ‘I worry about what they will do to the tall cottonwoods and what they will do to this view,’ he said, ‘and the beauty of it is irreplaceable.’ But Harter, like thousands of other landowners, doesn't have much choice. Two days earlier, Harter had been in court trying to stop TransCanada, which had asked a judge to let it exercise eminent domain and force Harter to give it access to his land. Harter lost.”
Cover interlude: Ceremony plays the Violent Femmes’ “Kiss Off” for the AV Club.
Got tips, additions, or comments? E-mail me.
Still to come:The weakest recovery since WWII; doctor shortages get worse; amendments hit the cybersecurity spotlight; higher tariffs on Chinese wind-turbine makers; and men throw rocks with their weaker hand.
The recovery is the weakest since WWII. “The worst U.S. recession since World War II has also had the weakest recovery. The nation’s economy has grown 6.7% since the recession officially ended in mid-2009, according to revised data released by the Commerce Department Friday. That is slower growth than earlier data suggested and makes it the worst three-year recovery in the postwar period. The current recovery is weaker even than the moribund rebound that followed the 1980 recession, when the economy eked out 7.2% growth over three years despite falling back into recession for 16 months. And the 1980s recovery was followed by several more quarters of robust growth, a feat the economy shows no sign of repeating this time around.” Ben Casselman and Neil Shah in The Wall Street Journal.
@daveweigel: Obama admin should stop releasing economic reports, explaining that they'd just be SPOILERS for election results.
The Fed’s FOMC meets this week. “Another summer, another US slowdown, another Federal Reserve meeting to decide what to do about it. The drama has become rather routine. If the script is to be the same this year as it was in 2010 and 2011, then August should mark the opening move, followed by a Jackson Hole speech from chairman Ben Bernanke, and then the main event in September. But any drama driven by the economy is unpredictable and this one could still go in a different direction. This week's meeting of the rate-setting Federal Open Market Committee, which concludes on Wednesday, is finely balanced. The Fed goes into the meeting with a strong easing bias but not a lot of new data with which to untangle a complicated economic outlook.” Robin Harding in The Financial Times.
Drops in federal spending are slowing the recovery. “Falling military spending and the end of federal stimulus programs are further slowing the already weak U.S. economic recovery. In recent weeks, policy debate in Washington has turned to the looming ‘fiscal cliff,’ billions of dollars in spending cuts and tax increases set to take effect at the start of the new year…Recent economic data show that long before the fiscal cliff hits, federal spending already is falling–and taking a toll on the recovery. Federal spending and investment fell at an annual rate of 0.4% in the second quarter and has fallen 3.3% in the past year. Federal employment has fallen by more than 52,000 jobs in the past year and for the first time is lower than when the recovery began.” Ben Casselman and Conor Dougherty in The Wall Street Journal.
White House projections for the 2012 deficit fell slightly. “The nation's budget deficit would hover around $1 trillion for a fifth straight year in 2013 if Congress finally enacts President Obama's policies for boosting the sluggish economy, the White House said Friday. Administration projections for the 2012 budget deficit fell slightly, to $1.2 trillion, due in part to the failure of Congress to adopt major pieces of the jobs package Obama unveiled last fall. But White House projections for next year's budget gap jumped from $900 billion to $991 billion on the assumption that those provisions would ultimately be enacted. The deficit would plummet in 2014 under Obama's policies, settling around $600 billion a year for the rest of the decade, according to the projections.” Lori Montgomery in The Washington Post.
The Simpsons interlude: Insightful quotes from Ralph Wiggum.
Doctor shortages are likely to worsen with Obamacare. “In the Inland Empire, an economically depressed region in Southern California, President Obama's health care law is expected to extend insurance coverage to more than 300,000 people by 2014. But coverage will not necessarily translate into care: Local health experts doubt there will be enough doctors to meet the area's needs. There are not enough now. Other places around the country, including the Mississippi Delta, Detroit and suburban Phoenix, face similar problems. The Association of American Medical Colleges estimates that in 2015 the country will have 62,900 fewer doctors than needed. And that number will more than double by 2025, as the expansion of insurance coverage and the aging of baby boomers drive up demand for care. Even without the health care law, the shortfall of doctors in 2025 would still exceed 100,000.” Annie Lowrey and Robert Pear in The New York Times.
@heif: “We have a shortage of every kind of doctor, except for plastic surgeons and dermatologists,"
A court ruled against the birth control mandate for the first time. “A federal court said Friday that a Colorado-based company does not have to comply with the Obama administration's birth-control mandate because of the employer's religious beliefs. Several businesses and religious groups have sued over the policy, which requires most employers to provide contraception coverage in their healthcare plans. Friday's temporary injunction is the first time a court has ruled against the policy. Judge John Kane emphasized that his ruling only applies to the specific company whose lawsuit he considered — Colorado-based Hercules Industries.” Sam Baker in The Hill.
The future of the cybersecurity bill now hinges on amendments. “The fate of the Senate’s cybersecurity reform measure now hinges on amendments — and bill sponsors, the White House and top Republicans have all drawn their lines in the sand. The challenge for the Cybersecurity Act of 2012 after a key procedural vote Thursday is whether a growing number of amendments can resolve enough differences to attract GOP support in the Senate — and, ultimately, the House, too — while not completely removing the teeth that Democrats and the Obama administration think is essential to protect the nation from cyber threats. Some Republicans are angling for a broad set of revisions to the critical infrastructure and information sharing bill, and a bloc of GOP members plans to pitch its own cybersecurity measure — the SECURE IT Act — as an amendment during the forthcoming floor debate.” Tony Romm in Politico.
Ungracefulness interlude: Men Throwing Rocks With Their Other Hand.
The House GOP unveiled a one-year farm bill extension with disaster aid. “Anxious to show progress before the August recess, House Republicans unveiled legislation late Friday that would extend most current farm programs for one year while providing immediate disaster aid to livestock producers impacted by this summer's severe drought. Direct cash payments would be trimmed modestly to help cover the costs, but their extension is controversial in itself since both the House and Senate Agriculture Committees have recommended reforms that would end the multibillion-dollar subsidies. The Senate approved its new five-year plan in June, but House floor action has been blocked by Republican leaders fearful of divisions in the GOP's ranks. The one-year extension now is seen by many as a calculated effort to kill any chance of enacting the larger bills in this Congress, and it sets up what could be a highly charged partisan vote on the House floor next week.” David Rogers in Politico.
@TimAeppel: Unlike 1930s, drought amid financial crisis hitting states with some of strongest economies in the country.
Drillers have a friend in the Bureau of Land Management. “Bill Stringer leaned into the office of his top deputy here at the Bureau of Land Management one recent day to share his latest victory. ‘We got upheld!’ Mr. Stringer said, meaning his bosses in Salt Lake City had gone along with his staff's recommendation to allow oil drilling near Desolation Canyon, a national historic site known for its pristine wilderness and white-water rafting. Despite objections from environmentalists, more oil wells would dot the huge stretch of federal land Mr. Stringer oversees. Mr. Stringer, 55, who sports a goatee, rides a motorcycle and sometimes wears rock band T-shirts to work, is a little-known manager in an agency many Americans have never heard of, but he is arguably as powerful as many of Utah's elected officials. As head of the bureau's outpost in northeast Utah, he and his colleagues make decisions that have affected livelihoods and largely favored oil and natural gas companies eager to join in a national energy boom.” Eric Lipton in The New York Times.
TransCanada received approval for the southern leg of its pipeline. “While rejecting TransCanada's initial Keystone XL pipeline application to build the pipeline across the border from Canada, President Obama has embraced the southern leg of the project, which would ease a bottleneck that is slowing the movement of oil supplies from Canada and North Dakota to refineries on the coast of the Gulf of Mexico. On March 22 in the Cushing, Okla., oil terminal and pipeline crossroads, Obama directed agencies ‘to cut through the red tape, break through the bureaucratic hurdles, and make this project a priority . . . and get it done.’ On Friday, TransCanada received the last of three permits it needed from the Army Corps of Engineers to begin construction on the 485-mile stretch of pipeline.” Steven Mufson and Juliet Eilperin in The Washington Post.
The U.S. raised tariffs on Chinese wind-turbine makers. “Chinese manufacturers have been illegally selling steel towers for wind turbines below the cost of production and will have to pay duties of 20.85 to 72.69 percent on imports, the United States Commerce Department said Friday in a preliminary ruling in an antidumping case brought by four American tower manufacturers. The department said it found similar dumping on the part of Vietnamese manufacturers and set duties at 52.67 percent for CS Wind, a major supplier to the American market, and 59.91 percent for all other Vietnamese companies. The finding is the fourth this year in favor of American wind and solar manufacturers and is likely to intensify tension with the Chinese, who have been rapidly expanding manufacturing capacity for alternative energy technologies and flooding global markets with inexpensive products, especially solar panels.” Diane Cardwell in The New York Times.
Wonkbook is compiled and produced with help from Karl Singer and Michelle Williams.