Jan. 31, 2013

Welcome to Wonkbook, Ezra Klein and Evan Soltas’s morning policy news primer. Send comments, criticism, or ideas to Wonkbook at Gmail dot com. To read more by Ezra and his team, go to Wonkblog.

Wonkbook’s Number of the Day: -0.1 percent. That’s the annualized contraction in America’s gross domestic product, according to the most recent report from the Bureau of Economic Analysis. The first decline since 2009, it is driven by sharp drops in defense spending and inventories. More below.

Wonkblog’s Graph of the Day: 90 percent of entitlement benefits go to people older than 65, the disabled, and the working poor.

Wonkbook’s Top 5 Stories: 1) The American economy shrinks for the first time since 2009; 2) the Fed’s latest meeting; 3) the many holes in the individual mandate; 4) Obama’s schedule for immigration reform; and 5) the Senate’s gun debate.

1) Top story: The American economy shrank last quarter. Here’s what you need to know.

The economy shrank in the fourth quarter of 2012. “The U.S. economy contracted slightly in the final months of 2012, as defense spending plummeted and businesses depleted their inventories, in a surprising development that could give hints of the economic challenges to come…Gross domestic product fell at a 0.1 percent annual rate in the fourth quarter, the Commerce Department said Wednesday, far below the 1.1 percent gain that analysts had forecast. The number will be revised extensively in the months ahead as more complete data becomes available, but if the number stays in negative territory, it would be the first contraction for the U.S. economy since the second quarter of 2009.” Neil Irwin in The Washington Post.

Read: The Q4 2012 GDP report.

The private sector grew. Government shrank. “The biggest threat to the recovery now appears to be Washington, with lawmakers gearing up for another round of debates over spending cuts and raising the nation's debt ceiling. Wednesday's GDP report served only to harden the battle lines between Republicans who believe significant spending cuts are necessary to balance the federal budget over the next decade and Democrats who argue they will stunt growth.” Ylan Q. Mui in The Washington Post.

@DKThomp: If there’s anything we can learn from recent history here or abroad, it’s that austerity is truly the elixir of growth.

Why did defense spending plunge 22 percent and kill GDP? “Less spending from the Pentagon, for one. Government defense expenditures plunged by a staggering 22.2 percent between October and December. According to the Bureau of Economic Analysis, the Pentagon spent significantly less on just about everything except military pay. Had the Pentagon not cut back on spending, the economy would have grown at a weak but positive 1.27 percent pace.” Brad Plumer in The Washington Post.

Explainers: Dylan Matthews shows us the only chart you need on the GDP report, and Neil Irwin on the U.S. economy in one chart. The Washington Post.

Government is hurting the economy by spending too little. “[T]he government is hurting the recovery, and badly. But it's not because it's spending too much, or because of concerns over future policy. It's because government, at all levels, is spending and investing too little. Despite the stimulus and various other policies we've passed to help the recovery, and despite the large deficits the government has been running, government spending and investment have, at all levels, been contractionary since 2010.” Ezra Klein in The Washington Post.

@justinwolfers: Underneath the bad GDP report, we see solid growth in consumption and investment. Actually, it looks like private spending was humming along

White House: GOP responsible for economic contraction. “White House press secretary Jay Carney laid the blame for a surprise economic contraction squarely at the feet of congressional Republicans Wednesday, saying economic threats during the ‘fiscal cliff’ negotiations had prevented important defense spending…Carney said that was partially attributable to the threat of sequestration, which would implement across-the-board spending cuts if a long-term deficit deal is not reached.” Justin Sink in The Hill.

…But ADP says we gained 192,000 jobs in January. “Buried by this morning's unexpected GDP figures was the release of the payroll processing firm ADP's latest estimates of private sector job growth. Those estimates were generally positive. The report found that 192,000 private sector jobs were gained in January, though the December numbers were revised down to 185,000 from 215,000.” Dylan Matthews in The Washington Post.

@Reddy: GDP growth in the 1Q 2013 is likely to bounce back (most forecasts above 2%). But consumer spending could suffer from the payroll tax hike.

DWYER: Good news lurks in the GDP report. “The overall number disguises strong consumer spending and business investment in equipment and software, which zoomed upward. You could even say the strength of consumer spending and business capital expenditures is the bigger surprise, more than the contraction.” Paula Dwyer in Bloomberg.

BAUM: It’s not as bad as it looks. Really. “Fiscal-cliff fickleness was nowhere to be found in today’s first look at the fourth quarter. Business investment in equipment and software rose 12.4 percent, among the larger increases in the current expansion. Residential investment (housing) posted a solid 15.3 percent increase. And consumer spending was up 2.2 percent, driven by strong purchases of durable goods.” Caroline Baum in Bloomberg.

@justinwolfers: The decline in US GDP is all about inventories (subtracting 1.3%-pts from growth), and cuts in defense spending.

TYSON: The growth challenge. “During the last two years, Washington has been obsessed with the need to cut the deficit and put the debt/GDP ratio on a "sustainable" path, even as global investors have flocked to US government debt, driving interest rates to historic lows. The considerable progress that has been made on deficit reduction over the next ten years has been overlooked. Also overlooked have been the immediate challenges of low growth, weak investment, and high unemployment. It is time to refocus. The US needs a plan for faster growth, not more deficit reduction.” Laura Tyson in Project Syndicate.

@JimPethokoukis: As recently as its 2011 econ forecast, WH predicted 4.0% GDP growth in 2012, 4.5% in 2013, 4.2% in 2014.

THRUSH: Obama’s headache. “[T]he politics are unambiguously terrible for Barack Obama. This was a White House humming along with its “Recovery Winter” storyline, and Wednesday’s bad number forces them into a defensive crouch after an early 2013 spent on offense…But the bad news for Obama was an interruption in the we’re-finally-roaring-back narrative — it was the worst GDP hit since the depths of the ’09 near-depression.” Glenn Thrush in Politico.

KINSLEY: The conspiracy to cut the deficit. ”Krugman and other deficit doves seem to think that the only reason anyone would be a deficit hawk at a time like this is that he or she wants to wants to dismantle the government. They say America needs growth, and the only path to growth is through deficit spending. Is it not at least possible, though, that some folks really mean it when we say, no, we really are concerned about the effect of the national debt on America's long-run prosperity?” Michael Kinsley in Bloomberg.

Music recommendations interlude: The Shins, “The Past and Pending,” 2001.

Top op-eds

AMAR: Senate democracy, RIP. “Senate democracy--not just Senate Democrats--suffered two significant setbacks last week. One wound was partly self-inflicted. The other was mischief worked by judges. President Obama's wiliest and most subtle adversary--Senate Minority Leader Mitch McConnell--has just won big, twice.” Akhil Reed Amar in Slate.

MILBANK: Tea Party, RIP? “It is too early to call a requiem for the tea party. The informal movement still dominates the House Republicans…But if the tea party isn't over, some of the more sensible partygoers are heading for the exits, realizing that things are getting rowdy and the neighbors may soon be calling the cops…Demagoguery works well in bad times, but it's harder [now] to stoke fear and anger.” Dana Milbank in The Washington Post.

WESSEL: Does uncertainty matter? “So has Washington lifted the weight of uncertainty sufficiently that the U.S. economy is on the verge of a growth spurt? It doesn’t look like it…In a new National Association for Business Economics survey, three-quarters of respondents said anxiety over the fiscal cliff had no effect on their companies’ hiring or capital spending.” David Wessel in The Wall Street Journal.

BAUM: How will Ryan balance the budget in 10 years? “Ryan's previous budget, the "Path to Prosperity" didn't balance the budget until 2040. Now he claims he can do it by 2024? Ryan's fiscal 2013 budget pared the deficit to 1 percent of GDP by 2017, where it remained before dwindling to nothing in 2040. His magic formula included spending cuts, tax simplification and lower rates, the repeal of Obamacare and premium support for individuals to choose their Medicare plan…Now comes the caveat. A budget on paper often bears no resemblance to reality. In 2001, for example, the CBO projected a cumulative $5.6 trillion surplus over the next 10 years.” Caroline Baum in Bloomberg View.

YGLESIAS: The idiocy of sequestration. “Another budget crisis is almost upon us! This time it's not the dread fiscal cliff or the debt ceiling, but rather the ‘sequester’--the extremely crude cutting mechanism that essentially nobody favors but that seems likely to happen anyway. It'll drag down the economy, impair the functioning of the government across the board, and do nothing to improve America's fiscal sustainability over the long run” Matthew Yglesias in Slate.

WILL: Chris Christie is the un-Romney. “His budget for 2013 calls for spending less than did the state's 2008 budget. He has vetoed a tax on millionaires three times. He has scrapped, exuberantly, with public employee unions. In the aftermath of Superstorm Sandy, 41,000 families are still homeless. Nevertheless, 61 percent of his constituents think the state is on the right track, more than twice the 27 percent who thought so when he entered office three years ago. His 74 percent job approvalrating includes 56 percent among Democrats and 78 percent among independents. This in a state where only 29 percent view the Republican Party favorably.” George Will in The Washington Post.

Artsy interlude: Andy Warhol once painted a picture of healthcare cost inflation.

2) What the Fed had to say

The Fed will continue an accommodative monetary policy. “The Federal Reserve is keeping its foot pressed firmly on the monetary gas pedal amid news that the economy essentially stalled late last year. Fed officials decided Wednesday, at the conclusion of their first policy meeting of 2013, to keep purchasing $85 billion a month of mortgage-backed and Treasury securities and signaled no intention, for now, to let up.” Jon Hilsenrath and Victoria McGrane in The Wall Street Journal.

Read: The January 30 FOMC statement.

Follow-up: How the statement changed since the last meeting.

The Fed isn’t worried about the GDP drop, and 3 other takeaways. “The Federal Reserve concluded its first policy meeting of the year Wednesday and elected to go with continuity rather than any major changes to their policy stance. Recognizing a ‘pause’ in the economy, the Fed said the causes were temporary but that it would keep buying bonds and keep its target interest rate near zero. Here are the major developments from the latest statement by the Federal Open Market Committee.” Neil Irwin in The Washington Post.

Why central banks must learn to manage expectations and uncertainty. “A crucial question, therefore, is how much influence economic policy makers can have over expectations of nominal GDP. Monetary policy, done right, has a lot — more influence, say, than current-quarter nominal GDP. Even if the Federal Reserve couldn’t have avoided the initial crisis, it could have kept the recession shorter and shallower if it had done a better job of anchoring expectations and curbing uncertainty. Lately, it has been doing just that. Since the Fed clarified its commitment to economic recovery, nominal GDP expectations have normalized and uncertainty has fallen sharply.” Evan Soltas in Bloomberg.

Humorous interlude: A government call-center worker made a computer game of his boring job.

3) The individual mandate — and its holes

Obama admin. takes steps to implement individual mandate. “The Obama administration took new steps Wednesday toward implementing the individual mandate in its signature healthcare law, downplaying the scope of the unpopular provision by stressing rules that allow exemptions from the requirement to purchase insurance…In 2014, people who choose not to buy insurance and don’t quality for an exemption from the mandate will have to pay a fine of $95. The penalty increases to $695 by 2016, and then rises annually based on a pre-determined formula.” Sam Baker in The Hill.

…But families are excluded from the affordability standard. “[N]ew regulations leave intact a policy that advocates say could leave millions of families without guaranteed access to affordable coverage…The 9.5 percent standard applies to individual policies -- even for employees who are trying to cover a whole family.” Sam Baker in The Hill.

…And states without Medicaid expansion don’t have the individual mandate. “HHS clarified that the mandate doesn’t apply to people who are eligible for Medicaid but live in states that don’t take part in the law’s Medicaid expansion.” Sam Baker in The Hill.

Meet the healthcare panel that’s never met. “A panel charged with helping devise solutions to the nation's health care workforce crisis is having a workforce crisis of its own: It hasn't been funded, and it's never met. Created by Congress nearly three years ago under the health care law, the panelists were appointed, but that's about as far as it has gone…The National Health Care Workforce Commission was supposed to help prevent or at least prepare for an anticipated spike in demand for primary care.” Kyle Cheney in Politico.

How to cut $9.4T from Medicare, in 150 steps. “On Wednesday morning, the Kaiser Family Foundation released its most ambitious Medicare reform document: 150 cost-cutting policies that span 216 pages. If you enacted all of them in one fell swoop, you would cut $9.4 trillion in Medicare spending over the course of the next decade.” Sarah Kliff in The Washington Post.

Buying health insurance is insanely confusing. Can the Affordable Care Act fix that? “Next year, 8 million Americans will turn on their computers and attempt to buy health insurance from a Web site like the one Massachusetts built. That prospect has health policy experts and behavioral economists rushing to figure out: How do they make a confusing, overwhelming process really, really easy?” Sarah Kliff in The Washington Post.

Photographic interlude: Of all the panoramas Wonkbook has shared, this one might be the best. Taken atop the Burj Khalifa in Dubai.

4) Obama’s immigration-reform schedule

Obama offers a rough timetable for immigration reform. “President Obama said Wednesday that he wants Congress to pass an overhaul of immigration law in the first half of the year, suggesting that if lawmakers cannot produce a detailed plan within a few months, he would probably intervene with his own legislation. In interviews with Hispanic television networks, Obama, for the first time, gave a rough timetable for an overhaul of immigration policy. He told interviewers at Telemundo and Univision that he thought a March deadline for a plan was sensible.” Zachary A. Goldfarb in The Washington Post.

How immigration reforms have failed over and over again. “In judging whether immigration reform will succeed, it's helpful to know why so many past attempts by Congress and the White House to change the system have failed. Here's a timeline of the major attempts to deal with illegal immigration and why they didn't make the cut.” Rachel Weiner in The Washington Post.

…And digging in-depth on why the 1986 reform effort was a bust. “The last time Congress enacted sweeping immigration reform was back in 1986…There was just one problem -- the 1986 reform didn't work. The law was supposed to put a stop to illegal immigration into the United States once and for all. Instead, the exact opposite happened. The number of unauthorized immigrants living in the country soared.” Brad Plumer in The Washington Post.

Is our border security working? “Legislators now want to ramp up these efforts even further as part of comprehensive immigration reform. But is our border really more secure because of these additional measures? It's a question that's actually quite difficult to answer, as the American Immigration Lawyers Association lays out in a new report.” Suzy Khimm in The Washington Post.

…And how do we prevent businesses from hiring illegal immigrants? “[A] recent policy paper from the Migration Policy Institute explains, the reality is a lot less stringent [than the law]. All employers have to do to comply with the law is complete a form called an I-9 verifying new workers' legal status. Doing more than that opens employers up to penalties for discriminating on the basis of citizenship status or national origin. And even if they don't fill out the form, fines start at only $3,200 per worker, and max out at $16,000 per worker for third or additional offenses. Perhaps unsurprisingly, employer compliance is much lower than it is for other workplace laws and regulations, such as the minimum wage.” Dylan Matthews in The Washington Post.

…And do guest worker programs even work? “The most common analysis holds that the programs were far less temporary than initially intended…The current system isn't immune to this kind of gaming. People overstay their visas all the time.” Dylan Matthews in The Washington Post.

Wonkbookmark interlude: A social site where the only thing you share are “must-reads.”

5) Debating guns in the Senate

Senators were quiet in the gun hearing. “Senators on both sides were very careful to avoid saying anything that could be seen as personally insulting the victims of gun violence -- some of whom were in the room. And there were fewer of the long-winded speeches like those at last week's hearings with Secretary of State Hillary Clinton on Benghazi. Time after time, the senators and witnesses seemed to back down from confrontation.” Ginger Gibson in Politico.

Read: The transcript of the hearing of the Senate Judiciary Cmte.

Explainer: Why the Judiciary Cmte. is the new political center of the universe.

Obama going to Minneapolis to make case for gun control. “President Obama will travel to Minneapolis next week as part of his continuing efforts to mobilize public support around his broad gun-control agenda. A White House official said Obama will meet with local elected officials and law enforcement officials Monday to study steps Minneapolis has taken to reduce gun violence. The president also plans to tout his national proposals.” Philip Rucker in The Washington Post.

COHN: How to build a better assault-weapons ban: “One sign that the advocates of new gun laws have learned from the past is that their proposals are more sophisticated, and savvy, than the ones they put forward last time.² Under the assault weapons proposals circulating now, including the proposal from California Senator Diane Feinstein, a gun would be illegal if it had just one criteria of an automatic rifle, rather than two. Lawmakers are also talking about new restrictions on high-capacity magazines…More important, advocates for gun laws have quietly shifted their priorities. The assault weapons ban continues to get the most publicity, but the real focus--for advocates and the lawmakers they support--is on a better system of background checks.” Jonathan Cohn in the New Republic.

SARGENT: There’s a consensus forming around background checks. “In addition to these two GOP Senators (Coburn and Kirk), we have Chuck Grassley and GOP Rep. Phil Gingrey, both of whom have expressed support for expanding the background check system. GOP Rep. Paul Ryan has also expressed support, which means it could very well get a vote in the House of Representatives. And what about other red and purple state Dems up for reelection in 2014, all of whom were supposed to run for their lives from any gun reform measure? Well, senators Mark Warner of Virginia and Tim Johnson of South Dakota both support background checks. And as noted above, Joe Manchin of West Virginia is working with this emerging bipartisan group reported on by USA Today.” Greg Sargent in The Washington Post.

Scientific interlude: Magnetic transistors could replace electronic ones

Wonkblog Roundup

Wall Street is mixed on taxes. Ezra Klein in The Washington Post.

Et Cetera

Thursday is a great day for a longread: Putting the “lie” in LIBOR. Liam Vaughan and Gavin Finch in Bloomberg.

President Obama’s popularity surges to a 3-year high. Scott Clement and Aaron Blake in The Washington Post.

Wind power installations set record in 2012. Ryan Tracy in The Wall Street Journal.

Meet Erica Goshen, the new head of the Bureau of Labor Statistics. Jamie McAndrews in Liberty Street Economics.

For the first time ever, we have two black senators. David Weigel in Slate.

Why the U.S. may have an emerging student-debt crisis. Ruth Simon and Rachel Louise Ensign in The Wall Street Journal.

White House wants to offset sequester cuts with end to oil-and-gas tax breaks. Zack Colman in The Hill.

Federal contractors remain calm as sequester looms. Marjorie Censer and Jim Tankersley in The Washington Post.

Delayed auto pollution rules finally make their way to the White House. Ben German in The Hill.

Treasury is weighing an exit from Ally Financial. Jeffrey Sparshott and Andrew R. Johnson in The Wall Street Journal.

Treasury posts a loss on TARP auctions. Jeffrey Sparshott in The Wall Street Journal.

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

Wonkbook is produced with help from Michelle Williams.

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