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Posted at 2:24 AM ET, 11/24/2010

Wonkbook: The best predictor for 2012, the corporate profits puzzle, and who'll be the next Larry Summers?

By Ezra Klein


If you were watching cable news yesterday, you probably caught wind of a poll showing President Obama running a point behind Mitt Romney in early-2012 match-ups. Ignore it. The forecast that matters -- both political and substantively -- is the one that came out of the Federal Reserve yesterday. The Central Bank is lowering its expectation for growth and employment in 2012. They now expect unemployment to remain above 9 percent in 2011, and above 8 percent in 2012.

It's not impossible that Obama could win with those numbers, but it's not a sure thing, either. The most common comparison for Obama is Ronald Reagan. At this point in the cycle, both presidents had approval ratings in the low-40s, and both presidents had just suffered large midterm defeats. But the recession facing Reagan was the product of tight Fed policy meant to break stagflation When the Fed loosened the reins, the economy roared back to life. By November of 1984, the jobless rate had fallen from a high of 10.8 percent down to 7.2 percent. If Obama gets those numbers, Romney doesn't stand a chance. But if the Fed's projection proves optimistic -- and that's already happened once this year -- the White House could be facing a serious uphill climb.

Top Stories

The Fed is lowering its economic expectations for 2011, reports Neil Irwin: "Top Federal Reserve officials project that the unemployment rate, now 9.6 percent, will fall only to about 9 percent at the end of 2011 and about 8 percent when the next presidential election arrives, in late 2012. The central bankers had envisioned a more rapid decline in joblessness in their previous forecasts, prepared in June. The sober economic forecast comes despite signs that the recovery is picking up slightly. The Commerce Department said Tuesday that gross domestic product rose at a 2.5 percent annual rate in the three months ending in September, not 2 percent as earlier estimated. And there have been solid readings in recent weeks on job creation, manufacturing and retail."

Corporate profits are at an all-time high, report Luca di Leo and Jeffrey Sparshott: "U.S. companies' profits rose in the third quarter to an annual rate of $1.66 trillion, the highest on record, reflecting the divergence between the recovery for the corporate sector and American households...The corporate-profit figures, which aren't adjusted for inflation, accompanied the government's latest estimate for overall economic growth in the third quarter. The U.S. economy expanded at a faster pace than previously thought during the quarter, in part because of stronger consumer spending and exports. But growth remained too weak to cut the high unemployment rate."

Matthew Yglesias notes that those numbers aren't adjusted for inflation, and if you do make the adjustment, corporate profits aren't at an all-time high:

Most voters want to keep or expand health care reform, reports Steven Thomma: "The post-election survey showed that 51 percent of registered voters want to keep the law or change it to do more, while 44 percent want to change it to do less or repeal it altogether. Driving support for the law: Voters by margins of 2-1 or greater want to keep some of its best-known benefits, such as barring insurers from denying coverage for pre-existing conditions. One thing they don't like: the mandate that everyone must buy insurance."

A poll suggests voters want anti-health care reform Congressmen to decline health benefits:

The Obama administration is working on replacing Larry Summers, report Jackie Calmes and Michael Shear: "Mr. Obama has interviewed several people, including Roger Altman, an investment banker and a former deputy Treasury secretary in the Clinton administration. Also under consideration is Gene Sperling, who was a National Economic Council director under President Bill Clinton and is now an adviser at the Treasury Department. But officials said the president would interview other people for the job and was not likely to make a choice until next month."

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

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Indie video interlude: Sufjan Stevens' "Too Much".

Still to come: Two-thirds of TARP money now repaid; GOP splits on ethanol; for-profit colleges are posting poor graduation rates; Dem group looks to use Citizens United to its advantage; and the most stylish squirrel you've ever seen.


The top House Democrat on budget issues wants to give the fiscal commission's report a full hearing, reports James Politi: "The US fiscal commission’s proposals to shrink the US budget deficit should be fully considered in the next Congress, Chris Van Hollen, who will be the leading Democrat on the House budget committee in 2011, told the Financial Times. His comments represent an apparent softening of his party’s stance...Mr Van Hollen’s seemingly more conciliatory tone came a week before the commission reconvenes for final deliberations, amid doubts about its ability to reach a political consensus. But Mr Bowles and Mr Simpson said last week that there may be more “common ground” among the panelists than is assumed."

The federal insider trading inquiry is expanding to include big firms:

More than two-thirds of the TARP funds have been repaid, reports Damian Paletta: "TARP was created to be a $700 billion program, but much of the money wasn’t used. The Dodd-Frank financial overhaul law essentially capped the amount of money that could be used at $475 billion. 'Nearly 70% ($477 billion) of the original $700 billion has been repaid, offset with profits, or canceled,' Treasury said on Tuesday. Treasury projected that more money would continue to come in through the program, and it reiterated an October estimate that the 'overall lifetime cost' of the program would be roughly $50 billion."

The Fed considered and rejected setting a long term interest rate target:

Treasury Department regulators are looking to reform the foreclosure process, reports Brady Dennis: "Barr said regulators have been conducting on-site examinations of some of the nation's largest mortgage servicers. The exams are designed in part to ensure that filed foreclosures meet legal requirements and that affidavits the firms are filing in the nation's courts are accurate...Barr said investigators are expected to complete their field work by the end of the year and report back to the oversight council in January. They then plan to aggregate their findings and determine what regulatory actions would rectify the problems."

Adorable animals in couture interlude: A '40s-era fashion squirrel.

Health Care

Long-term health reform will require hospital consolidation, writes Steven Pearlstein: "Here's the dilemma: The only way for the health-care industry to move toward accountable care is to further accelerate a process of consolidation that has already reduced competition and increased market power... Because of its early embrace of 'managed care,' California is already farther along the path toward this new model of health care. And a study published earlier this year by Health Affairs found that this kind of consolidation is one reason that California has some of the higher health costs and health premiums in the nation. In some cases, private insurance companies pay 'must-have' hospitals and powerful physician groups twice the rate they are paid by Medicare, with double-digit annual rate increases now routine."

Americans pay too much for health care -- now, in convenient chart form:

Domestic Policy

For-profit colleges have very low graduation rates, reports Daniel de Vise: "The report says that 22 percent of students in four-year programs at for-profit colleges earn degrees within six years, compared with 55 percent graduation rates at public colleges and 65 percent at private nonprofit schools...For-profit colleges have operated under an intense regulatory microscope this year. The Obama administration is pushing reforms that focus on aggressive recruiting practices and programs that don't lead to what officials call 'gainful employment.'...The analysis by Education Trust found six-year graduation rates in the industry ranging from a high of 67 percent at School of Visual Arts in New York, with 3,351 students, to a low of 9 percent at the University of Phoenix, with 238,326 students."

A new Democratic group seeks to take advantage of Citizens United in 2012, reports Ben Smith: "Kathleen Kennedy Townsend, chairwoman of a new liberal group promising to spend millions of dollars against Republicans in the 2012 election, told POLITICO that Democrats’ qualms about outside spending shouldn’t be allowed to get in the way of the party’s key substantive issues...The New York Times reported today that Kennedy Townsend and Brock, the group’s treasurer, have commitments of $4 million from liberal donors. The launch of American Bridge represents as shift away from President Obama’s 2008 ban -- simultaneously high-minded and serving the interest of his well-funded, tightly controlled campaign -- on his supporters funding outside groups."

The FCC could adopt net neutrality rules next month:

Homemade instrument interlude: A medley of pop songs played on PVC pipe.


Arnold Schwarzenegger is hawking California's climate law as a national model:

The Senate GOP is split on extending ethanol subsidies, writes Greg Sargent: "DeMint and Coburn, two leading conservatives, are calling on fellow Republicans to support letting the subsidies expire as a way to prove the GOP is serious about reining in government spending. Just as the battle over earmarks did, ethanol subsidies could put GOP Senators who have supported them in the past -- such as Grassley and Orrin Hatch -- in an awkward spot, driving a wedge between them and conservatives who want a harder line on spending. Now Grassley has responded to our story, firing off an angry Tweet at DeMint and Coburn, asking them rhetorically if they're also willing to back the expiration of tax subsidies for the oil and gas industry."

Even if countries lived up to their emissions goals, global warming would not be sufficiently reduced, reports John Broder: "If all 85 countries fully lived up to their promises, would the increase in global average temperatures stay below 2 degrees, or even below 1.5 degrees, as many of the most vulnerable countries are demanding? Alas, no, according to the most thorough assessment of the Copenhagen promises to date, a study conducted by the United Nations Environment Program with assistance from climate modelers and statisticians from Europe, Mexico, the United States and several other countries. The report, released on Tuesday, found that even if all the pledges were met according to strict accounting rules, it would only achieve about 60 percent of the reductions needed to meet the 2 degree target."

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

By Ezra Klein  | November 24, 2010; 2:24 AM ET
Categories:  Wonkbook  
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Next: Was the GM bailout a success?


You guys should stop complaining because, one the health care we have now isnt as good as it was supposed to be. also the law has just been signed so give it some time. so if u want to say u have the right to choose tell that to ur congress men or state official. If you do not have insurance and need one You can find full medical coverage at the lowest price check .If you have health insurance and do not care about cost just be happy about it and trust me you are not going to loose anything!

Posted by: ricardoeddy | November 24, 2010 3:52 AM | Report abuse

That PVC pipe instrument is pretty cool. Not sure "Turkish March" or "The Hall of the Mountain King" qualify as pop music, but "The Final Countdown" was awesome.

Posted by: MosBen | November 24, 2010 7:53 AM | Report abuse

"But the recession facing Reagan was the product of tight Fed policy meant to break stagflation When the Fed loosened the reins, the economy roared back to life."

Yep, this is key. The Fed right now is as loose as the proverbial goose. As that isn't what's wrong it will only hurt the econ. Also, Obama has passed leg that slows the econ. Real UM is ~18% right now not, 9%. It is possible but highly unlikely that the econ will be much better for the run up to the '12 elections.

Posted by: illogicbuster | November 24, 2010 8:01 AM | Report abuse

The Citizens United article is amusing. It continues the narative pushed by the liberal media that all these conservative special interest groups, using the recent Supreme Court ruling on corporate election spending, outspent the poor outgunned Democrats in the 2010 mid terms. Hogwash. The reality is that thanks to their own special interest groups the Democrats dramatically outspent the Republicans in this past election. I also enjoyed the whole controversy stirred up by Obama wherere he talked about all the foreign money being spent by the Chamber of Commerceto fund Republican election efforts. Pretty funny considering that the various union organizations recieve vastly more foreign money than the chamber. I'd like to see the media do some stories where they compare how much special interest money was spent supporting each pary, how much foreign money each party's supporters brought in and how much money was spent by secret groups. I suspect they'd find that in all cases the Democrats got vastly more money.

Posted by: RobT1 | November 24, 2010 8:23 AM | Report abuse

Except that California has the biggest budget deficit in the nation and is LOSING so called green jobs, not gaining them.

Posted by: 54465446 | November 24, 2010 9:23 AM | Report abuse

Whoever's chosen won't be the next Larry Summers. He'll be a figurehead or adviser on other things. Someone like Austin Goolsbee will be the next Larry Summmers. Obama's smart and informed enough to know you need an economist to advise on economics.

Posted by: RichardHSerlin | November 24, 2010 3:43 PM | Report abuse

Ezra, your optimism on the economy getting much better before Obama runs for reelection is nice, but probably not warranted. Krugman's been beating the Rogoff-Reinhardt drum for perhaps a year, noting that slowdowns following financial crises are unusually persistent. Robust economic policies could potentially make things better, but QE2 won't be enough, and in case it was missed, the political party that just took the majority in the House is opposed even to that inadequate step, making vigorous Keynesian stimulus nothing more than a fond wish. Political scientists have known for a generation that American presidential elections are really just referenda on the economy, and the economic literature (to the extent I understand it) suggests the economy's going to be quite dispiriting. Perhaps in an Obama-Palin matchup voters could give Obama one more chance, but I don't think even that's certain.

To say "the White House could be facing a serious uphill climb" is far too sanguine. It's entirely possible that the '12 outcome was set in stone from the moment Christina Romer's $1.3T stimulus estimate was rejected.

(And no, I'm not really TBogg.)

Posted by: tblogg | November 27, 2010 5:30 AM | Report abuse

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