Unemployment

These comments have been the occasion for much wailing and gnashing of teeth, as if anyone, anywhere, believed that the Republicans’ 2011 debt-ceiling antics were some sort of one-off. But Boehner was clear on Tuesday. “I will again insist on my simple principle of cuts and reforms greater than the debt limit increase,” he said.

Of course he will. For one thing, it worked well for him in 2011. Republicans got more than $900 billion in immediate spending cuts, as well as $1.2 trillion in triggered spending cuts — though they don’t much like the $500 billion or so of those cuts scheduled to fall on the Pentagon. They also drove President Obama’s approval ratings beneath 40 percent. And while I’m not one who thinks Republicans intentionally tank the economy to undermine Obama, there’s little doubt that the effect of the debt-ceiling debacle was to set back the recovery, brightening Republican prospects and darkening Democratic ones. The fact is that it’s easier to be sanguine about economic showdowns when you’re not the ones in charge.

For another, it’s Boehner’s only option in 2012. The Democrats, for once, have nothing but fiscal leverage. They’ve got the expiration of the Bush tax cuts, which all Republicans would hate and many Democrats would welcome. They’ve got the aforementioned spending trigger, which Republicans really have begun to fear for its cuts to defense spending. They can do nothing — or, more likely, offer Republicans a deal they can’t accept — and the resulting paralysis will swing fiscal policy far, far, far to the left. Threatening to default on the national debt is Boehner’s only piece of counter-leverage.

So of course Boehner will try and use the debt ceiling as leverage again. And again. And again. It’s pretty clear that, at this point, there’s no going back to the time when debt-ceiling increases came smoothly. If I were the market, I’d take the fact that the leader of one of the two parties has publicly said that he “welcomes” debt-ceiling showdowns as evidence that the United States is almost certain to default on its debt — if only temporarily — within the next decade or so.

The question is what, aside from complain, Democrats and the business community will do to stop him. Somehow, the debt ceiling needs to be taken off the table once and for all, either because Republicans forced a default in a way that they were blamed for the consequences and scared into never doing it again or because the president successfully pulled off one of the more creative maneuvers suggested during last year’s showdown (Bill Clinton, for instance, argued that Obama should invoke the Fourteenth Amendment — which says “the validity of the public debt of the United States … shall not be questioned” — to raise the debt ceiling unilaterally).

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Top stories

1) Boehner threatened another debt-mageddon “Washington braced Tuesday for a replay of last summeras tense battle over the burgeoning national debt as House Speaker John A. Boehner threatened again to block an increase in the federal debt ceiling without significant new cuts in spending. Treasury Secretary Timothy F. Geithner and other senior Democrats quickly blasted the Ohio Republican, arguing that his ultimatum could put the nationas credit rating — and the broader economy — at risk early next year, when the debt is expected to hit its $16.4 trillion limit.” Lori Montgomery in The Washington Post.

@damianpaletta: Boehner’s debt ceiling “line in the sand” is very similar to what he said last year; Definitely got the attention of White House and D’s

@ObsoleteDogma: Shorter Boehner: Regulatory uncertainty is bad. But default uncertainty is good.

INTERVIEW: Sen. Tom Coburn on defusing the debt bomb.

READ: Mitt Romneyas remarks on the debt.

@MichaelSLinden: As a fiscal policy analyst, I’d like to thank Mitt Romney for offering no specifics whatsoever so I can go home at a normal time tonight.

2) Greece failed to form a new government, triggering new elections. “The threat of a full economic collapse in Greece escalated Tuesday after warring political factions here failed to forge a new government, triggering fresh elections and heightening chances that this rudderless Mediterranean nation could be forced to abandon the euro…A nation in danger of running out of cash to operate the government, and where fearful residents in recent days have been rapidly withdrawing more of their savings from Greek banks, faces uncertain new elections next month. Opinion surveys have shown that Syriza, a party that wants to break the terms of Greeceas bailout deal and that came in a surprise second in the last vote, is polling in first place…European finance ministers — whose taxpayers have largely funded the bailout for Greece — were quick to push back Tuesday. Given the potential shock waves if Greece is forced to leave the euro zone, there have been suggestions in recent days that European officials might show more lenience with Athens.” Anthony Faiola in The Washington Post.

Surging bank withdrawals in Greece sparked fears of a bank run. “Greek depositors withdrew a!700 million ($898 million) from the country’s banks on Monday, fueling fears of a bank run amid the growing political disarray. With deposits falling, Greek banks become even more dependent on the European Central Bank to meet their funding needs, exposing the central bank to potentially huge losses if Greece leaves the euro area. Greek President Karolos Papoulias told the country’s political leaders that bank withdrawals plus buy orders received by Greek banks for German bunds totaled some a!800 million on Monday, a transcript of his comments said. A central bank official confirmed the figures…Monday’s deposit withdrawal far outpaced Greek banks’ steady decline in deposits since the start of the country’s debt crisis in 2009, as depositors withdraw cash and transfer funds overseas.” Brian Blackstone and David Enrich in The Wall Street Journal.

@grossdm: So, Greece is seeking to solves its economic problems through QE — quantitative electioneering

3) The Senate will vote on several GOP budget proposals today. “The Senate on Wednesday will hold six hours of debate and votes on four different Republican budget resolutions, in an apparent attempt to demonstrate that they will not be supported in the Democratic-led Senate. A fifth budget measure up for a vote, from Senate Budget Committee ranking member Jeff Sessions (R-Ala.), is based on President Obama’s budget and is seen as an attempt to embarrass the White House. But Senate Budget Committee Chairman Kent Conrad (D-N.D.) said Tuesday that debate and votes on the GOP proposals would show there is little appetite for these plans. He also said it would give the country a chance to understand that last year’s Budget Control Act already sets spending caps for Congress. Democrats have been under fire for failing to pass any budget resolution…One of the four GOP budget resolutions to be debated Wednesday is H.Con.Res. 112, the budget resolution approved by the House in March.” Pete Kasperowicz in The Hill.

4) The Justice Department started a criminal probe into JPMorgan Chase’s loss. “The Justice Department has initiated a criminal probe into the $2 billion trading loss at JPMorgan Chase, a law enforcement representative familiar with the situation said Tuesday. The inquiry is at a very early stage, said the person, who spoke on the condition of anonymity because the matter is private. Many details about the loss at JPMorgan are murky, so it is unclear what laws, if any, may have been violated. But the attention from federal officials indicates that regulatory pressure is rising on JPMorgan, and its chief executive Jamie Dimon, to explain what exactly led to the bankas multi-billion dollar misstep. That, in turn, has rekindled questions about whether government regulators are equipped to monitor banks making risky, complex trades…Dean Boyd, a Justice spokesman, declined to comment.” Jia Lynn Yang and Sari Horwitz in The Washington Post.

Too big to fail banks have gotten bigger. “JPMorgan Chaseas $2 billion blunder is throwing the spotlight on an awkward truth for President Barack Obamaas promise to end the era of big bank bailouts: The same institutions that were deemed ‘too big to fail’ before the financial collapse are even bigger now. Efforts to manage the size of such institutions were at the heart of the Dodd-Frank financial law passed in July 2010. But nearly two years later, many of the lawas regulations remain in limbo, as federal agencies muddle through long rule-making processes against stiff industry opposition…All the while, the countryas biggest financial institutions continue to grow. The five largest, which controlled $6.1 trillion in assets before the collapse, by the end of 2011 had assets worth $8.5 trillion — equal to more than half of U.S. economic output, according to Federal Reserve data.” Patrick Reis in Politico.

@BCAppelbaum: This whole JPM story underscores one reason we don’t have effective financial regulation: Our public officials don’t understand finance.

Top op-eds

1) PORTER: It’s time for the euro to come to an end. “Social upheaval across the euro area suggests that it may be time to call it quits and try to work out an orderly process to re-establish national currencies throughout the bloc. Europe would be in much better shape if the euro didnat exist and each member country had its own currency. Monetary union has shackled together nations with vastly different economies, depriving them of an independent monetary policy that can help them through rough times. The interest rate and exchange rate that serve Germany also have to serve Spain, though that country has more than four times Germanyas joblessness. The main problem is that while leaders eagerly embraced the monetary bond, they rejected its necessary complement: a central budget that would transfer money from successful regions to underperforming ones, as the United States government sends tax dollars collected in Massachusetts to pay for unemployment benefits in Nevada.” Eduardo Porter in The New York Times.

2) FROST: The FDIC shouldn’t protect investment banks. “I suggest that we divide the two functions into separately owned, managed and regulated entities. That’s the only way we can ensure that their riskier businesses don’t undermine the insured deposits that are the foundation of a stable and healthy economy. Taxpayer safety-net programs, such as the Federal Deposit Insurance Corporation (FDIC), should be available only to banks in business to provide insured deposits. Financial institutions that provide primarily investment, hedging and speculative services don’t deserve protection either by the FDIC’s explicit guarantees or by an implicit understanding that taxpayers will bail them out because there is no other alternative. Indeed, this kind of protection is a perversion of capitalism and can distort its good outcomes…We need a real and impregnable firewall that keeps one part of the banking system–and the economy–from being consumed when the other goes into flames.” Tom Frost in The Wall Street Journal.

3) ROSEN: Competitive bidding can hurt patients. “On the face of it, competitive bidding sounds like a very good idea. If one supplier can provide power wheelchairs or oxygen masks for 30 percent less than another, itas hard to argue for contracting with the more expensive supplier, especially at a time when everyone is looking for ways to save money. A one-year experiment with expanded competitive bidding that was recently conducted by Medicare yielded cost savings of 42 percent, without reducing the quality of care, and was hailed as a great success. But as a doctor working with patients on the ground, I have doubts about that quality-of-care measure, and I worry that those savings obscure a potentially serious problem…If competitive bidding is predicated on supplying equipment at the lowest possible price, something has to give. And more likely than not, that something will be patient care.” Dennis Rosen in The New York Times.

4) ORSZAG: Want good news on jobs? Look to big businesses. “Big business, we keep being told, has been so hampered by regulatory uncertainty over the past few years, it has been reluctant to hire workers. So it is surprising to read the results of a little-known survey from the Bureau of Labor Statistics: Very large businesses, it turns out, have been expanding their domestic workforces relatively rapidly. If, since January 2011, businesses of all sizes had hired at the same rate as those with 5,000 or more employees, we would have almost 4 million more jobs today…The JOLTS data highlight the importance of exploring how the continuing deleveraging process and resultant sluggish growth in demand is affecting smaller businesses in particular. With the percentage of working Americans stuck at a depressed level, we sure could use those extra 2 million to 4 million jobs.” Peter Orszag in Bloomberg.

5) ALEXANDER: Washington should take over Medicaid and let states handle education. “Staring down steep tuition hikes, students at the University of California have taken to carrying picket signs. As far as I can tell, though, none has demanded that President Barack Obama accept a Grand Swap that could protect their education while saving them money. Allow me to explain. When I was governor of Tennessee in the early 1980s, I traveled to meet with President Ronald Reagan in the Oval Office and offer that Grand Swap: Medicaid for K-12 education. The federal government would take over 100% of Medicaid, the federal health-care program mainly for low-income Americans, and states would assume all responsibility for the nation’s 100,000 public schools…If we had made that swap…states would have about $92 billion a year in extra funds, as they’d keep the $149 billion they’re now spending on Medicaid and give back to Washington the $57 billion that the federal government spends per year on schools.” Lamar Alexander in The Wall Street Journal.

Cover interlude: Screaming Females play Sheryl Crow’s “If It Makes You Happy” for the AV Club.

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

Still to come: Free trade with Colombia is in effect; Catholic bishops are close to suing over birth control; backlash against tests is growing; energy independence is within reach; and a puppies’-eye view of life.

Economy

The Senate will vote on two Fed nominees on Thursday. “Senate Majority Leader Harry Reid (D-Nev.) today set up a procedural vote for Thursday on two nominees to join the Federal Reserve whose nominations have stalled because of opposition from Sen. David Vitter (R-La.)…Vitter blocked attempts in March to quickly confirm Harvard University economics professor Jeremy Stein, a Democratic nominee, and former private-equity executive Jerome Powell, a Republican nominee…Asked whether he was confident that he would have the 60 votes to invoke cloture on the nominations, Reid said, ‘Well I sure hope so, weave been waiting months and months.’…Senate Minority Leader Mitch McConnell (R-Ky.) said he believes there is bipartisan support for the nominees…Without the two nominees in place, the Federal Reserve Board will remain short-handed as it attempts to support the economic recovery” Humberto Sanchez in Roll Call.

The dip in gas prices eased inflation. “The recent slide in gasoline prices in the U.S. has pushed the nation’s annual rate of inflation to its lowest level in more than a year, easing some economic strains on consumers. The consumer price index, which measures what Americans pay for everything from breakfast cereal to doctor visits, was unchanged from March to April, ending three months of increases, the Labor Department said Tuesday. A 2.6% drop in the gasoline-price index helped offset rising costs for many other items. Overall prices are now running 2.3% higher than a year ago, the smallest increase since February 2011…The inflation figures have mixed implications for the recovery. Lower gasoline and utility costs are keeping a lid on household expenses, effectively boosting Americans’ spending money. However, prices are climbing broadly, most notably for food, but also medical care, rents, autos and airfares.” Josh Mitchell in The Wall Street Journal.

States are using foreclosure prevention funds to plug budget gaps. “Hundreds of millions of dollars meant to provide a little relief to the nationas struggling homeowners is being diverted to plug state budget gaps. In a budget proposed this week, California joined more than a dozen states that want to help close gaping shortfalls using money paid by the nationas biggest banks and earmarked for foreclosure prevention, investigations of financial fraud and blunting the ill effects of the housing crisis. California was awarded more than $400 million from the banks, and Gov. Jerry Brown has proposed using the bulk of that sum to pay the stateas debts. The money was part of a national settlement valued at $25 billion and negotiated with five big banks over abuses in their mortgage and foreclosure processes…As part of the settlement, the banks agreed to pay the states $2.5 billion, money intended to help homeowners and mitigate the effects of the foreclosure surge.” Shaila Dewan in The New York Times.

House Republicans are planning a vote on a ‘fast track’ proposal for tax reform. “Speaker John Boehner said in a speech Tuesday that House Republicans would try to attach a timeline to fast-track a broad tax overhaul to a vote extending the George W. Bush-era tax rates before the November elections…’Our bill to stop the New Yearas Day tax increase will also establish an expedited process by which Congress would enact real tax reform in 2013,’ Boehner (R-Ohio) said in remarks to a fiscal summit in Washington. ‘This process would look something like how we handle Trade Promotion Authority, where you put in place a timeline for both houses to act.’…GOP aides said that, even though Boehner specifically discussed Trade Promotion Authority on Tuesday, House Republicans are looking at a variety of expedited processes that have been used in the past, and have yet to settle on just one.” Russell Berman and Bernie Becker in The Hill.

@grossdm: Memo to Boehner, the markets, etc.: the House passing legislation won’t be sufficient to avert tax increases. They’ll have to make a deal

The euro zone narrowly missed recession. “The euro-zone economy narrowly escaped recession in the latest quarter thanks to a surprising rebound in Germany, which offset deepening downturns in Spain and Italy. Although the region avoided two straight quarterly drops in gross domestic product, the common benchmark for recession, the figures nonetheless reflect a deepening divide between Germany and the rest of the euro zone that complicates the bloc’s efforts to stem its debt crisis…Euro-zone GDP was unchanged from the previous quarter, said Eurostat, the European Union’s statistics agency. In annualized terms, GDP rose 0.1% from the fourth quarter, according to calculations by J.P. Morgan Chase. Economists had expected an annualized contraction of around 1%. GDP fell at a 1.2% rate in the fourth quarter…European stock markets rose initially on the figures, which eased fears that the debt crisis may trigger an economic free fall.” Brian Blackstone in The Washington Post.

Export-Import Bank reauthorization cleared the Senate by a wide margin. “On a broad bipartisan vote of 78 to 20, the Senate voted Tuesday to extend the life of the U.S. Export-Import Bank and expand its authority to make loans to U.S. exporters. In the ‘Schoolhouse Rock’ version of how Capitol Hill works, this is what Congress does all the time — passes legislation. But it made for big news on this Capitol Hill, where protracted partisan warfare has meant that lately the story has more often been about votes forced by one party or the other to indignantly demonstrate the otheras opposition…Tuesdayas bill was the rarest of breeds: a lasting compromise on an issue of substance. It renewed the charter of what is commonly referred to as the Ex-Im bank for three years and will over that time raise the cap on the total financing the bank can guarantee from $100 billion to $140 billion.” Rosalind Helderman in The Washington Post.

The U.S.-Colombia free trade agreement took effect. “A free-trade agreement between the U.S. and Colombia took effect Tuesday after years of negotiations and despite strong opposition from U.S. labor organizations, which are worried about jobs being sent abroad and union-busting violence in Colombia. The first products shipped tariff-free were crates of Colombian roses and other flowers that landed Tuesday morning at Miami’s airport…President Barack Obama signed the free-trade agreement with Colombia in October, days after Congress gave its final approval following heated debates. The deal was originally negotiated by the Bush administration, but President Obama reworked the deal to satisfy Democrats. The U.S. exported $14 billion of goods to Colombia last year, everything from cars to consumer electronics to food, and exports are expected to rise by more than $1.1 billion as a direct result of the pact, according to the International Trade Commission.” Dan Molinski in The Wall Street Journal.

Adorable children singing interlude: Two girls cover Gotye’s “Somebody That I Used To Know” from the back seat of the car.

Health Care

Catholic bishops are threatening to sue over the birth control mandate. “The Catholic Church’s U.S. hierarchy warned Tuesday that without quick action by Congress, it will sue the Obama administration for mandating that insurance plans provide birth control to women without a co-pay. ‘[F]orcing individual and institutional stakeholders to sponsor and subsidize an otherwise widely available product over their religious and moral objections serves no legitimate, let alone compelling, government interest,’ lawyers for the U.S. Conference of Catholic Bishops wrote in a letter to federal regulators. Several small Catholic universities have already filed suit over the policy…The bishops’ notice came in 20 pages of comments submitted to the Department of Health and Human Services (HHS) on a forthcoming rule to accommodate certain religious organizations, such as Catholic hospitals, that were not exempted from the original mandate.” Elise Viebeck in The Hill.

Obamacare will expand healthcare options for immigrants. “The Obama administrationas drive to cut down on Americaas uninsured is about to get multilingual. Come 2014, when core provisions of the Affordable Care Act kick in, millions of legal immigrants will have new options for gaining health coverage. And like U.S. citizens, most will be subject to the individual mandate, under which they will be required to get coverage to avoid a penalty. The national health law explicitly excludes illegal immigrants — a politically explosive topic — and bans them from the new state insurance exchanges, even if they use their own money. They will make up a big chunk of the remaining uninsured population. But advocates say states have good reasons to reach out and get uninsured legal residents covered — especially as the federal government picks up most of the tab…In 2014…legal immigrants will be able to shop for health coverage through the new state insurance exchanges.” Kyle Cheney in Politico.

Domestic Policy

The backlash against standardized testing is growing. “The increasing role of standardized testing in U.S. classrooms is triggering pockets of rebellion across the country from school officials, teachers and parents who say the system is stifling teaching and learning. In Texas, some 400 local school boards–more than one-third of the state’s total–have adopted a resolution this year asking lawmakers to scale back testing. In Everett, Wash., more than 500 children skipped state exams in protest earlier this month…The efforts are a response to the spread of mandatory testing in the past decade. Proponents say the exams are needed to ensure students are learning and teachers’ effectiveness is measured. Critics say schools are spending disproportionate time and resources on the tests at the expense of more-creative learning. They also contend the results weigh too heavily in decisions on student advancement, teacher pay and the fate of schools judged to have failed.” Stephanie Banchero in The Wall Street Journal.

The NLRB suspended implementation of its union elections rule. “The National Labor Relations Board (NLRB) suspended implementation on Tuesday of a rule that would speed up union elections. On Monday, U.S. District Judge James Boasberg struck down the regulation. In his ruling, the judge said the labor board only had two members vote on the final rule in December 2011 when it needed three members to form a quorum. In the wake of the court decision, the agency is temporarily suspending the rule’s implementation, which went into effect on April 30. Further, Lafe Solomon, the NLRB’s acting general counsel, withdrew guidance he sent to the labor board’s regional offices and told those offices to follow the old union election rule instead. The agency is still considering its response to the court ruling…’We continue to believe that the amendments represent a significant improvement in our process and serve the public interest by eliminating unnecessary litigation,’ said NLRB Chairman Mark Pearce.” Kevin Bogardus in The Hill.

Dog’s-eye view interlude: Life from on top of puppies.

Energy

Energy independence is no pipe dream. “Every president since Richard Nixon has called for the U.S. to wean itself from needing oil from unstable or unsavory countries. The nation’s new-found energy riches are likely to bring that ambition closer to reality in the next two decades, according to many forecasters. It’s no pipe dream. The U.S. is already the world’s fastest-growing oil and natural gas producer. Counting the output from Canada and Mexico, North America is ‘the new Middle East,’ Citigroup analysts declare in a recent report. The U.S. Energy Information Agency says U.S. oil imports will drop 20% by 2025. Oil giant BP projects the U.S. will get 94% of its energy domestically by 2030, up from 77% now, as oil imports fall by half…Most enticing, a team of analysts and economists at Citigroup argues that the U.S., or at least North America, can achieve energy independence by 2020.” Tim Mullaney in USA Today.

@umairh: So consider how our political institutions are paralyzed by a financial crisis. Now think about energy, water, etc crises. Sweet!

Wonkbook is compiled and produced with help from Karl Singer and Michelle Williams.

Itas truly an honor to be with you in the historic Mellon Auditorium. It was here in the spring of 1949 that the United States and our closest allies gathered to sign the North Atlantic Treaty, giving birth to NATO.

On that occasion, President Truman declared that people awith courage and vision can still determine their own destiny. They can choose freedom or slavery.a

In our time, all of these great nations face a grave threat to freedom, one from within, and that is debt. It is shackling our economies and smothering the opportunities that have blessed us with so much.

Once again the world looks to the United States for what it always has: an example. It is the example of a free people whose hard work and sacrifice make up the sum total of thriving towns and a vibrant economy. Itas a humble government that lives within its means and unleashes the potential of first-rate ideas and world-class products. Itas a nation never content with the status quo and always on the make.

I got a glimpse of this example growing up working at my dadas tavern just outside Cincinnati, and then lived a piece of it running my own small business.

Instead of this shining example, what does the world now see?

A president on whose watch the United States lost its gold-plated triple-A rating for the first time in our history;

A Senate, controlled by the presidentas party, that has not passed a budget in more than three years;

And, earlier this month, another unemployment report showing that the worldas greatest economy remains unable to generate enough jobs to spur strong and lasting growth.

If you should know one thing about me, itas that Iam an optimist.

Yes, times are tough, but our future doesnat need to be dark. We donat have to accept a new normal where the workplace looks more like a battlefield and families have to endure flat incomes, weak job prospects, and higher prices in their daily lives.

We have every reason to believe we can come out of this freer and more prosperous than ever. And we will, if we confront our challenges now while we still have the ability to do so.

For the solution to what ails our economy is not government a itas the American people.

The failure of astimulusa a a word people in Washington wonat even use anymore a has sparked a rebellion against overspending, overtaxation, and overregulation.

Americans, who take pride in living on a budget, recognize we canat go on spending money we donat have, and that our economy is stuck in large part because itas stuck with debt.

Nationwide, weare seeing a groundswell of support for bold ideas that reject small politics, cast off big government, and return us to common sense and first principles a the kind of ideas that will restore prosperity and substantially improve the trajectory of our economy.

In March, as part of our Plan for Americaas Job Creators, the House passed an honest budget with real spending cuts, pro-growth tax reform, and serious entitlement reform. Itas a far-reaching effort to control governmentas worst habits and capitalize on the American peopleas best. This budget gets our fiscal house in order AND promotes long-term growth. Far from settling for stability, it offers a true path to prosperity.

Various bipartisan commissions and coalitions have devised ambitious plans as well. The math and the mix are different, but the goals are mainly the same.

And of course, there are summits like these that bring together people who just get it. Of course, while Iam happy to be here and Iam sure we all enjoy each otheras company, we can also agree that weave talked this problem to death.

Itas about time we roll up our sleeves and get to work.

For all the focus on Election Day, another date looms large for every household and every business, and thatas January 1, 2013.

On that day, without action by Congress, a sudden and massive tax increase will be imposed on every American a by an average of $3,000 per household. Rates go up, the child tax credit is cut in half, the AMT patches end, the estate tax returns to 2001 levels, and so on.

Now, it gets a little more complicated than that. What will expire on January 1 is cause for concern a as is what will take effect. That includes:

Indiscriminate spending cuts of $1.2 trillion a half of which would devastate our men and women in uniform and send a signal of weakness;

Several tax increases from the health care law that is making it harder to hire new workers;

As well as a slate of energy and banking rules and regulations that will also increase the strain on the private sector.

But a| it gets even more complicated than that.

Sometime after the election, the federal government will near the statutory debt limit.

This end-of-the-year pileup, commonly called the afiscal cliff,a is a chance for us to bid farewell a permanently a to the era of so-called atimely, temporary, and targeteda short-term government intervention.

For years, Washington has force-fed our economy with a constant diet of meddling, micromanagement, and manipulation. None of it has been a substitute for long-term economic investment, private initiative, and freedom

Previous Congresses have encountered lesser precipices with lower stakes, and made a beeline for the closest lame-duck escape hatch.

Let me put your mind at ease. This Congress will not follow that path, not if I have anything to do with it.

Having run a business, I know that failing to plan is planning to fail. The real pain comes from doing nothing a| aausteritya is what will become necessary if we do nothing now. Weall wake up one day without a choice in the matter.

Thereas also no salvation to be found in doing anything just to get by, just to get through this year.

aNothinga is not an option, and aanythinga is not a plan. To get on the path to prosperity, we have to avoid the fiscal cliff, but we need to start today.

To show my intentions are sincere, Iall start with the stickiest issue, and that of course is the debt limit.

On several occasions in the past, the debt limit has been the catalyst for budget agreements. Last year, however, the president requested a quote-unquote acleana debt limit increase a business as usual.

Well Iave run a business, and thatas no way to do it. Itas certainly no way to run a government either, especially one that has run up a debt bigger than the entire economy. Business as usual will no longer do.

So last year around this time, I accepted an invitation to address the Economic Club of New York. I went up there and said that in my view, the debt limit exists in statute precisely so that government is forced to address its fiscal issues.

Yes, allowing America to default would be irresponsible. But it would be more irresponsible to raise the debt ceiling without taking dramatic steps to reduce spending and reform the budget process.

We shouldnat dread the debt limit. We should welcome it. Itas an action-forcing event in a town that has become infamous for inaction.

That night in New York City, I put forth the principle that we should not raise the debt ceiling without real spending cuts and reforms that exceed the amount of the debt limit increase.

From all the way up in Midtown Manhattan, I could hear a great wailing and gnashing of teeth. Over the next couple of months, I was asked again and again if I would yield on my aposition,a what it would take, if I would budgea|

Each and every time, I said anoa a| because it isnat a apositiona a itas a principle. Not just that a itas the right thing to do.

When the time comes, I will again insist on my simple principle of cuts and reforms greater than the debt limit increase. This is the only avenue I see right now to force the elected leadership of this country to solve our structural fiscal imbalance.

If that means we have to do a series of stop-gap measures, so be it a but thatas not the ideal. Letas start solving the problem. We can make the bold cuts and reforms necessary to meet this principle, and we must.

Just so weare clear, Iam talking about REAL cuts and reforms a not these tricks and gimmicks that have given Washington a pass on grappling with its spending problem.

Last year, in our negotiations with the White House, the president and his team put a number of gimmicks on the table. Plenty of thought and creativity went into them a things like counting money that was never going to be spent as savings.

Maybe in another time, with another Speaker, gimmicks like these would be acceptable.

But, as a matter of simple arithmetic, they wonat work.

They wonat work, and as I told the president, weare not doing things that way anymore.

What also doesnat count as acuts and reformsa are tax increases. Tax hikes destroy jobs a especially an increase on the magnitude set for January 1st. Small businesses need to plan. We shouldnat wait until New Yearas Eve to give American job creators the confidence that they arenat going to get hit with a tax hike on New Yearas Day.

Any sudden tax hike would hurt our economy, so this fall a before the election a the House of Representatives will vote to stop the largest tax increase in American history.

This will give Congress time to work on broad-based tax reform that lowers rates for individuals and businesses while closing deductions, credits, and special carveouts.

Eyebrows go up all over town whenever I talk about this, but when I say abroad-baseda tax reform, I mean it. We need to do it all a| deal with the whole code, personal and corporate itas fairer and more productive for everyone.

Thatas why our bill to stop the New Yearas Day tax increase will also establish an expedited process by which Congress would enact real tax reform in 2013. This process would look something like how we handle Trade Promotion Authority, where you put in place a timeline for both houses to act.

The Ways Means Committee will work out the details, but the bottom line is: if we do this right, we will never again have to deal with the uncertainty of expiring tax rates.

Weall have replaced the broken status quo with a tax code that maintains progressivity, taxes income once, and creates a fairer, simpler code.

And if we do THAT right, we will see increased revenue from more economic growth.

Again, change doesnat need to be sudden or painful.

Last fall, when I addressed the Economic Club of Washington, I said that making relatively small changes now can lead to huge dividends down the road in terms of debt reduction. As we approach the issue of the debt limit again, we need to continue to bear this in mind.

As you know, we could eliminate all of the unfunded liabilities in Social Security, Medicare and Medicaid tomorrow, and the effect within the Congressional Budget Office 10-year window could be minimal.

Thatas because changes to these programs take time and are phased-in slowly.

For example, when Congress last increased the retirement age for Social Security, the increase a a mere two years a was scheduled to fully take effect 40 years after the law was enacted.

Another example: take the House Budget Resolution and its assumptions for Medicare reform. Those would not even begin until after 2022.

Smart and modest changes today mean huge dividends down the line.

Now, I can already hear the grumbles a| partisans getting all worked up or people saying, eh, letas wait until after the election.

We canat wait. Employers large and small are already bracing for the coming tax hikes and regulations, which freeze their plans. The markets arenat going to wait forever; eventually theyare going to start reacting.

We now know that we ignore these warnings at our own peril.

Thatas why the House will do its part to ease the uncertainty surrounding the fiscal cliff. And I hope the president will step up, bring his partyas Senate leaders along, and work with us.

Because if thereas one action-forcing event that trumps all the rest a even the debt limit a itas presidential leadership.

Ladies and gentlemen, I believe President Obama cares about this country and knows what the right thing to do is. But knowing whatas right and doing whatas right are different things.

The difference between knowing whatas right and doing whatas right is courage, and the president, Iam sorry to say, lost his.

He was willing to talk about the tough choices needed to preserve and strengthen our entitlement programs, but he wasnat ready to take action.

As it turned out, he wouldnat agree to even the most basic entitlement reform unless it was accompanied by tax increases on small business job creators.

We were on the verge of an agreement that would have reduced the deficit by trillions, by strengthening entitlement programs and reforming the tax code with permanently lower rates for all, laying the foundation for lasting growth.

But when the president saw his former colleagues in the Senate getting ready to press for tax hikes, he lost his nerve. The political temptation was too great. He moved the goalposts, changed his stance, and demanded tax hikes.

We ended up enacting a package with cuts and reforms larger than the hike. But it could have been so much more.

The letdown was considerable. And, in turn, our nationas credit rating was downgraded for the first time.

Well it should also be the last time that happens, which is why I came here today.

If the president continues to put politics before principle a or party before country, as he often accuses others of doing a our economy will suffer and we may well miss our last chance to solve this crisis on our own terms.

But if we have leaders who will lead a| if we have leaders with the courage to make tough choices and the vision to pursue a future paved with growth, then we can heal our economy and again be the example for all to follow.

Iam ready, and Iave been ready. Iam not angling for higher office. This is the last position in government I will hold. I havenat come this far to walk away.

All my life, Iave operated by a simple code: if you do the right thing for the reasons, good things will happen.

Well, NOW is the time to do the right thing.

Letas do it for the right reasons a we donat need to be dragged kicking and screaming. Thatas not the American way. Letas summon the courage and vision to choose freedom, to choose prosperity, and to determine our destiny.

Then weall not only have succeeded in solving this crisis a weall be worthy of that success.

Thank you all.

Sen. Tom Coburn (R-Okla.) served on the Simpson-Bowles commission, is a member of the Gang of Six, and just published aThe Debt Bomb: A Bold Plan to Stop Washington from Bankrupting America.a We spoke last week in his office. This interview, which focuses on Americaas debt and growth problems, is the first in a two-part series. The second interview, which focuses on health care, will be published later this week.

Ezra Klein: So ataxmageddona is coming at the end of the year. Depending on how you look at it, itas an opportunity for Congress to trigger a massive and unnecessary fiscal crisis, or to actually get some serious legislating done on our long-term fiscal issues. Are you optimistic about the outcome?

Tom Coburn: No. But it depends on what the mix is. If President Obama is still president and weare in control of the Senate, I think youall see significant attempts to get something done. But I donat think theyall be much more successful than what we saw in August. And I wouldnat consider that very successful. If Romney wins and we win control in the Senate, we have to send a signal that weare going to fix it in order to take away all that potential risk to the economy. You have to say weall work all over the Christmas holidays to get it fixed.

EK: When you look at the Romney scenario, it seems Republicans have spent a few years now learning how to take tough votes on the budget, particularly on the Ryan plan. So if Republicans control the House and Senate, it seems to me that youad see quite dramatic action on those issues, as they can be passed with 51 votes through budget reconciliation.

TC: Well, you can. Ryan has a good plan. I donat think it goes fast enough. But the fact is heas got a plan. The president wonat put out a plan. The Senate Democrats wonat put out a plan. Itas kind of like boxing with a shadow. You canat ever hit it. But it doesnat matter if youare Democrat or Republican. The pain will get worse every year we donat fix these things. And there will come a time when it wonat matter if youare a Republican or Democrat. And I donat have much faith right now that weare up to the task of coming to agreement to fix this.

EK: I want to come back to the question of the plans in a second,. But your book opens by imagining a very dire fiscal crisis in 2014. And this goes to your contention that Ryanas plan doesnat bring down the debt fast enough. Where do you get the urgency of your schedule? I look at Treasuries and theyare selling with very low yields. So you can say thatas just the Federal Reserve manipulating prices. So then I look at credit default swaps on the United States, and there are no alarm bells there, either. I look at countries like Japan and England that have carried on with very high debt levels for a very long time. Weave seen other countries that control their own currency manage very high debt levels throughout the 20th Century.

TC: Well, you need to go study Japan. Theyare going to crash.

EK: People have been saying that for 20 years.

TC: You have two things coming together. This is the first year theyall be a net issuer of debt outside their country. Theyave totally financed all their debt internally. We havenat. Thatas one big difference. They also have a much lower birth rate. Seven births for every 1,000 people. So their population is shrinking and their demographic shift is much worse than ours. And this year, the postal system there that runs all their retirement accounts will not be buying any government debt. Zero. So the Japanese government, for the first time, is going into the international market. And the yenas value is going to decline against every major currency. Whether that happens this year or next year or in three years, itas going to happen. And theyave now had almost two decades of no real GDP growth. So Japan isnat going to make it. The reason they havenat had any problems is they havenat asked anyone else in the world to buy their debt. Now theyare going to have to.

The same thing ultimately will happen to us, but weall be the last person it happens to. The world still views this as the safest place. You see Greece, which will probably be out of the euro by the end of this year. Then you look at Spain and Italy and Portugal and Ireland. Europe is going to print money just like Ben Bernanke is printing money. And whatas the end result of that? Inflation.

EK Well, it depends how you manage it.

TC: How do you sterilize $3 trillion worth of debt?

EK: The difficulty for me when you say that is Iam a market-oriented guy. I trust the markets, more or less. And if you look at the marketas inflation expectations, theyare not high. They donat think what the Fed has done will lead to inflation.

TC: They donat now. But nobody ever does when you print money like that. If you study [Carmen] Reinhart and [Kenneth] Rogoff and what they said, they know whatas coming. Every country thatas ever been with a debt crisis and has printed money has ended up with an intentional inflation problem. Think for a minute that youare Ben Bernanke. Youare trying to control inflation, jumpstart the economy, and improve the unemployment rate. What do you think his long-term answer for this is?

EK: At the moment, I donat think he has one.

TC: His long-term answer is inflation.

EK: Not only do I think that would be an okay answer, but Reinhart and Rogoff do, too. Rogoff has been arguing for higher inflation for a long time. But Bernanke says he wonat permit that. And I donat see a reason he would allow inflation later but oppose it now, when it could really help. In fact, what heas been saying is he wonat do the monetary stimulus many want now specifically because he doesnat want to deanchor inflation expectations later.

TC: But 10 years from now, our bonds wonat be two percent. So what percentage of the total budget do interest costs become if you normalize back to the historical average? If you do that today, you add $650 billion to our annual interest costs. How long do you think he can keep two percent inflation? If he does, then weall continue to have two percent growth. In other words, if we start getting the growth, then weall see the inflation. The reason thereas no inflation now is thereas no velocity to the money. Weave got $2 trillion sitting on the sidelines with corporations in this country. Another few trillion in personal bank accounts. And the reason is no one has confidence in the future. And itas not so much the details of the plan to fix it as the psychological confidence it will get fixed. And thatas why I voted for Bowles-Simpson.

EK: When Bowles-Simpson went before the House, it was rejected by a huge bipartisan majority. Do you see there as being any possibility that one outcome of the taxmageddon period could, be a grand bargain in the Gang of Six/Simpson-Bowles vein?

TC: I donat know the answer to that, frankly. My hope would be we reach a grand compromise. But the vote in the House proves what I said in the book. You had a vote in the House on a plan that could solve our problems and the Democrats didnat vote for it because it touches Social Security and Republicans vote against it because of revenues. Both sides accentuated their differences rather than sending a signal to the international community that we could get together and cut $4.5 trillion over the next 10 years. Which raises the question: Why are they here? If youare here just to get reelected, youare worthless to the country.

EK: Youare searingly critical of Congress in the book. So let me ask you: How do you fix the Senate?

TC: Let the Senate operate the way itas supposed to. put stuff through committees. bring it up in regular order. Have an open amendment process. Iam the number one amendment offerer in the Senate in the last few years.

EK: Congratulations.

TC: Well, itas not necessarily a compliment. But the point is the Senate really could work if you let it work on the real issues. If you were to put Simpson-Bowles on the floor and really have a strong debate on that bill, it could get through the Senate.

EK: When I talk to the party tactician types, the senators trying to figure this out, their argument is that when you try to do this out in public, with 24-hour news media broadcasting every move and every possible compromise, the issue polarizes, the interest groups descend, the party bases descend, and solutions get taken off the table. In the end, they think there will have to be some big backroom deal. They think a more open process would make this harder, not easier.

TC: I just adamantly disagree. Thatas the sickness of Washington. What that really says is the politician doesnat want to stand up and debate and tell their interest groups no. We had the pharmacists in here earlier. They want a bill to protect community pharmacies. And I said, you know what, the market is changing, Iam not about to support a bill, even though you support me, that doesnat allow the market to work this thing out. I think the reason you get this kind of analysis is because people wonat stand up and do what they think is right because it hurts their political chances. And on our bonds, our bonds will be fine until theyare not, till that tipping point comes when they say crap, we canat get out of it.

EK: As you just said, youare a market guy. You want the market to work things out. You believe in the marketas ability to work things out. So why do you think your view of our likely debt and inflation path is so much more dire than the marketas?

TC: Because the market is biased towards up. Why do you invest in the market? Not because you think youall lose money. Why do you invest in bonds? To make money. Where is the contrarian view?

Let me give you one example. Five weeks ago, Bernanke said there would be no QE3. What happened to the 10-year bond in four days? It rose 48 basis points. What the market said then is if thereas no more QE3, weare going to short the value of a bond. Thatas one little signal. What if you get 20 signals? How do you explain the Chinese getting rid $160 billion of our debt last year? Eventually, theyare not going to buy our debt. Who bought most of our debt last year? It was the Federal Reserve. Go out there and try and float $10 billion of our long-term debt. You canat. Thereas no market. Because the long-term market is saying, send us a signal that youall fix this. And so the reason we have the shortest debt maturity in our countryas history is first, because you canat sell long-term debt because no one wants to buy it, and second, because long-term debt makes the deficit look worse.

Look, I may not be right. But what I see and the people I read — all I do at night is read economic reports on peopleas view of us — and when you look at it, Spain, wonat make it, the European Central Bank will eventually print money. You agree?

EK: Iam hoping so.

TC: Theyall do that to buy time. And where I agree with Paul Krugman is you canat just have austerity. You need growth, The question is how do you get the growth. Do you get the government-driven growth, or do you get confidence and certainty so that the private money comes in and creates the growth? One costs you double. The other costs you half. So thereas a fourfold difference in where you get the growth from. When you borrow the money to spend $800 billion, you got that debt hanging on you, which Reinhart and Rogoff have proven without a doubt, when youare at 90 percent and above, and weare at 101 percent right now, debt-to-GDP, thatas at least a one percent cut to growth.

EK: To go back to Krugman, if he were sitting here, head say in this crisis thereas been no evidence anywhere that cutting deficits leads to growth. Weave not seen it in the euro zone or the UK. And head say the Reinhart/Rogoff story is a correlation story. It doesnat prove that high debt always and everywhere hurts growth.

TC: Go look at Sweden. Hereas what Sweden did. They cut their spending and their taxes. They have the best growth rate in Europe. They had a surplus this year. They had growth at six-plus percent. They actually did a Reagan style approach to their problem by cutting spending and cutting taxes. And theyare the fastest growing with a decline in their debt-to-GDP ratio.

EK: But correct me if Iam wrong, but if I recall, Swedenas monetary policy went towards a very sharp devaluation, theyave been driven by export growth, and alongside Israel, theyave been more aggressive than any other central bank in the world. Theyave done stuff that if we did it here, people would lose their minds.

TC: I think there are monetary parts to that. But their finance minister put in place tough stuff. They had people who left Sweden because of the tax ratio. Now theyave moved back. And itas not a perfect example, but itas an exception to the Krugman story.

EK: Is there anything we need but deficit reduction to get growth back on the right path?

TC: Itas signals. The number one thing, and I think most economists would agree, confidence matters. If you have negative confidence, then you get much lower growth. If you have positive confidence you get much better growth with the same set of numbers. I think people are so disgusted with Washington that if we send a signal weare actually going to fix this — with any combination of tax and spending, remember that I voted for Simpson-Bowles — weall get our mojo back when people have some confidence in the future and see their Congress solving their problems.

EK: It seems your view is that just as the market needs to have faith in your demographics and in the flexibility of your labor market and the competitiveness, it has to have faith in your political systemas capacity to deal with long and short-term threats. Do you see any reason for the market to have that faith right now?

TC: No. One of my biggest worries is what happens if Romney wins and Republicans control both chambers, do they have the courage to do what it takes to fix the country? Itas kind of their last chance. If theyare given the favor of control and they donat act on it, why should you ever trust them again? You shouldnat. Itall be the death knell of the Republican Party. They controlled it all for four years under Bush and grew the government. They created a new entitlement with no revenue. Went against the very tenets of what they said they believe.

One of the reasons I wrote the book was to show a whole lot of people how many stupid things we do. I donat really blame presidents too much. You gotta get appropriations. I say the problem is not that we donat get along. We get along too well. Government is twice the size it was 10 years ago. The president canat spend the money if we donat appropriate it. So itas not a president problem. Itas a congressional problem.

EK: On the other side of that hypothetical, letas say Obama wins, but Republicans hold the House and maybe even take the Senate. How do they act in that hypothetical? Are they more or less willing to compromise with Obama?

TC: I donat know. Iam not good at predicting that. If President Obama is president again, those problems are still there and we have to solve them. He knows that. Weave had conversations where heas told me heall go much further than anyone believes heall go to solve the entitlement problem if he can get the compromise. And I believe him. I believe he would.

Californiaas fiscal crisis will look sadly familiar to close watchers of the national checkbook. Thatas because California is not having a fiscal crisis so much as a political crisis. The trigger may have been the recession, but the root cause was written into the state Constitution, and it was visible long before the housing boom went bust.

In California, passing a budget or raising taxes requires a two-thirds majority in both the stateas Assembly and its Senate. That need not pose a problem, at least in theory. The state has labored under that restriction for a long time, and handled it with fair grace. But as the historian Louis Warren argues, the vicious political polarization thatas emerged in modern times has made compromise more difficult.

All of this, however, has been visible for a long time. Polarization isnat a new story, nor were Californiaas budget problems and constitutional handicap. Yet the state let its political dysfunctions go unaddressed. Most assumed that the legislatureas bickering would be cast aside in the face of an emergency. But the intransigence of Californiaas legislators has not softened despite the spiraling unemployment, massive deficits and absence of buoyant growth on the horizon. Quite the opposite, in fact. The minority party spied opportunity in fiscal collapse. If the majority failed to govern the state, then the voters would turn on them, or so the theory went.

That raises a troubling question: What happens when one of the two major parties does not see a political upside in solving problems and has the power to keep those problems from being solved?

If all this is sounding familiar, thatas because it is. Congress doesnat need a two-thirds majority to get anything done. It needs a three-fifths majority, but thatas not usually available, either. Ever since Newt Gingrich partnered with Bob Dole to retake the Congress atop a successful strategy of relentless and effective obstructionism, Congress has been virtually incapable of doing anything difficult because the minority party will either block it or run against it, or both. And make no mistake: Congress will need to do hard things, and soon. In the short term, unemployment is likely to remain high and the economy is likely to remain weak unless Congress can muster another round of serious stimulus spending. The economist Karl Case, co-founder of the famed Case-Shiller housing index, now believes that earlier optimism about our economic recovery a which he shared a was misplaced. aThe probability is very high of a serious double dip like 1982,a he told the New York Times. The housing market seems to be sagging again, and the governmentas interventions a not just the stimulus but also relaxed standards at Fannie Mae, Freddie Mac and the Federal Housing Authority a are set to end.

Further out, the long-term deficit problem, which is driven largely by health-care costs, is startling. The Center for Budget and Policy Priorities estimates that debt will reach 300 percent of gross domestic product come 2050 a and that estimate might be optimistic. But solutions seem unlikely. No one who watched the health-care bill wind its way through the legislative process believes Congress is ready for the much harder and more controversial cost-cutting that will be necessary in the future.

Similarly, Sens. Kent Conrad and Judd Gregg recently suggested a bipartisan deficit commission that would reach a consensus on the budget and report back to a grateful Congress. On Tuesday, a Wall Street Journal editorial showed the conservative interest in such compromises: Republicans should aagree to a deficit commission only if it takes tax increases off the table,a it said, reminding wavering Republicans that aPresident George H.W. Bush renounced his no-new-taxes pledge and made himself a one-termer.a

These two problems get to the essential difficulties confronting the nation: There is no doubt that minority parties generally profit in elections when the unemployment rate is high. But given that reality, what incentive do they have to help the majority party lower the unemployment rate? Further out, there is no doubt that the majority party has an incentive to prevent a fiscal crisis on its watch. But what incentive does the minority party have to sign on to the screamingly painful decisions that will avert crisis?

In another system of government, that wouldnat much matter. In our system of government, which requires a supermajority in the Senate for most projects, it matters a lot. On Jan. 20, for instance, the Senate is expected to vote on raising the debt ceiling. Generally, this is a bipartisan vote, as the debt is a bipartisan creation. This year, Senate Minority Leader Mitch McConnell reportedly told Majority Leader Harry Reid that if he wants an increase in the ceiling, he owns it and needs to find the votes for it. Thatas the sort of budgetary brinksmanship that brings us back to California.

The lesson of California is that a political system too dysfunctional to avert crisis is also too dysfunctional to respond to it. The difficulty is not economic so much as it is political; solving our fiscal problem is a mixture of easy arithmetic and hard choices, but until we solve our political problem, both are out of reach. And we canat assume that an emergency, or the prospect of one, will solve the political problem for us. If you want to see how that movie ends, just look west, as we have so many times before.

And now we can see this in glorious chart form, thanks to Dave Altig of the Federal Reserve Bank of Atlanta. Since the recession began, the alabor force participation ratea has fallen from 66 percent to 63.6 percent. Altig estimates that about 0.9 percentage points of the drop was due to demographic factors, while about 1.5 points was due to the horrible economy. In other words, if the recession had never happened, the labor force participation rate would probably be about 65.1 percent:

So thatas about 1.5 percent of the eligible population a or about 3.6 million workers* a who have been elbowed out of the workforce by a subpar economy that didnat have enough jobs for everyone. (Although note that these subpar conditions began back in 2003 and accelerated with the recession.) So how many of these people will actually return to the workforce if the economy ever picks up steam again?

Thatas a tricky question because, as economist Brad Delong points out, many of those discouraged workers are in danger of losing their skills and work contacts and becoming apart of the astructurally non-employeda who we will never see back at work, barring a high-pressure economy of a kind we see at most once a generation.a

Hereas another graph, from Julie Hotchkiss of the Atlanta Fed, looking at what labor-force dropouts between 25 and 54 are actually doing once they leave:

Thereas been a big surge in workers going back to school a itas likely that theyall be back in the work force someday. But thereas also been a big surge in workers going on disability, as eligibility has gotten easier. Workers on disability are unlikely to come back. Thereas also the mysterious aothera category a itas not clear whether these workers will ever return to the workforce.

The question of how many labor force dropouts come back to the workforce isnat an idle one. It will affect how many jobs we need going forward. After all, if the labor force swells, then the U.S. economy will have to add more jobs to keep up.

Altig estimates that if the labor force participation rate stays where it is currently, then the U.S. economy will need to add just 144,000 jobs per month to get down to 7.5 percent unemployment by the end of 2013. On the other hand, if the labor force grows back to 65.1 percent a say, because a vast reserve of heartened workers start scanning wants ads again a then weall need to add 304,260 jobs per month to get to the same level.

* Correction: Itas 3.6 million workers missing from the labor force, not 4.5 million as originally stated.

What, exactly, are Greek politicians bickering about these days?

Recall Greeceas basic problem: The country racked up many billions of dollars in debt that it canat repay without help, and the Greek government doesnat have enough cash to cover all of its own obligations. In February, the European Central Bank, the European Commission, and the IMF (known as the atroikaa) agreed to renegotiate Greeceas debts with lenders and give Greece a a!130 billion ($170 billion) bailout. In return, Greece agreed to shrink its deficits with a series of spending cuts and tax hikes.

Hereas the dilemma: These austerity measures are spectacularly unpopular, and Greek voters keep punishing any party that tries to implement them. That puts the whole bailout deal at risk. Under the terms of the deal, the Greek government is supposed to pass an additional a!11 billion in spending cuts this summer before it receives its next bailout payment of a!31 billion. If those cuts donat happen, Greece wonat get its bailout money. It will then default on its debts, and the country would likely have to leave the euro. That could be bad.

So how did the recent Greek elections make this whole situation worse?

Basically, the elections have created a deadlock in the Greek parliament. The two Greek parties that had previously supported the bailout agreement, PASOK and New Democracy, lost votes. They no longer have enough seats to form a government on their own. Instead, a lot of voters flocked to the Coalition of the Radical Left, or Syriza, which is led by a 37-year-old engineer, Alexis Tsipras. Syriza flatly opposes the austerity/bailout agreement and refuses to form a government with any other party that doesnat agree. At the moment, there arenat enough votes for a pro-bailout or an anti-bailout government.

What happens if the Greek parliament canat break the deadlock and form a functioning government?

Then there will be a new set of elections, probably on June 17. This is the most likely outcome, says Kevin Featherstone, a professor of contemporary Greek studies at the London School of Economics.

But itas not at all clear what would happen in the next election. Polls show that Syriza, the anti-bailout party on the left, is gaining in popularity. That could create more paralysis. Many Greek experts think that Tsipras doesnat actually want to lead a he just wants to complain about spending cuts and the troika deal while leaving it to other parties to actually implement the painful austerity measures. But Syrizaas also getting popular enough that heas making it tough for a pro-bailout government to form.

So the politicians are paralyzed. What do the Greek people actually want?

Greek public opinion seems to be all over the place. Polls show that some 80 percent of Greeks would like to stay in the euro, but they also donat want to agree to the austerity measures that are part of the bailout deal, especially with unemployment already at 21.7 percent. aPeople do not understand that if Greece backs off from its commitments, theyall have to leave the euro,a says Elias Papaioannou, an economist at Dartmouth whoas in Greece right now. He says that much of the TV chatter in Greece gives off the impression that itas possible to stay in the euro and oppose the bailout.

Well, is there any way for Greece to stay in the euro and somehow still avoid sweeping austerity measures?

Not really. Papaioannou notes that there are plenty of ways, in theory, to tweak the terms of the troika bailout to make it a bit less painful for Greece. Greece could get even more time to pay off its debts. It could be allowed to ease up on spending cuts and wage cuts a to implement them over a longer time period. (Remember, Greeceas economy is expected to shrink by 6 percent this year, so itas not a great time for austerity.) Wealthier European countries could also pony up some more cash to help ease the Greek people through this period of contraction. But thereas only so much tinkering that can be done, adds Papaioannou. Greece is very severely in debt, and itas going to have to make some painful adjustments no matter what.

So whatas the best-case scenario for Greece staying in the euro?

One possible scenario is that Greeceas president appoints a new technocratic government to implement the austerity measures, says Featherstone. This could only happen, however, if the president was supported by PASOK and New Democracy a the two pro-bailout parties a as well as the Democratic Left party. That last party is pro-euro but anti-austerity and would probably take a huge hit in popularity if it turned around and supported a caretaker pro-austerity government. aItas a slim chance that this will happen,a says Featherstone. On Monday, Greek President Karolos Papoulias will meet with the parties for one last-ditch effort to form a government.

And even if Greece did form a new government that was in favor of the bailout agreement, could they actually go through with the austerity measures?

Thatas not clear, either. Experts say that both left-wing and right-wing parties a including the growing neofascist Chrysi Avgi, or Golden Dawn party a are likely to take to the streets if a new government forms and pushes through with a!11 billion in additional cuts. Bitter strikes and protests could ensue. Likewise, Syriza will no doubt denounce whatever government pushes through an austerity bill.

Germany and other European leaders are now openly talking about kicking Greece out of the euro. Wonat threats like those convince Greek politicians that they need to make cuts?

Maybe not. Itas quite possible that threats from the rest of Europe could actually hurt the chances that Greece will cave, says Papaioannou. He notes that similar threats by Germany before the May 6 elections may well have pushed people to extremist parties. aItas totally counterproductive,a says Papaioannou.

But wouldnat Greece actually be in worse shape if it got kicked out of the euro?

Probably. A recent analysis from UBS Investment Research found that Greece could lose 50 percent of its economic output in the first year alone after an exit. Not only that, but Greece wouldnat get any bailout money from the troika, and it wouldnat be able to borrow money from anyone else, so it would have to implement even more severe austerity measures than itas already being forced to do. Other reports have found less apocalyptic, but still dire consequences. The Financial Times has a fuller rundown of some of the ways a Greek exit could play out. None of them are pretty.

So even though Greeks donat actually want to leave the euro, and even though it would be horrible, they could still manage to get themselves kicked out inadvertently?

Right. Of course, itas possible that Germany and the rest of Europe will try to find a way to accommodate Greece, rather than letting the euro implode. But right now thereas a standoff, and itas not at all clear whoas going to blink first a or if anyone will blink at all.

The answer, according to the Wall Street Journal, is…soon. The paper reports that the botched trade is “likely to result this week in the departure of three of the highest ranking executives with direct ties to the investments.”

Over at Seeking Alpha, Gene Kirsch tried to put Hedgegate into a broader context. “JPMorgan losses are reported to be actually $800 million in Q2 with the potential for legal and other losses up to $4.2 billion over a longer period of time, possibly exceeding one year,” he wrote. “The banking unit of JPMorgan Chase alone made $12.4 billion last year. The holding company has over $2.26 trillion in assets and is the largest U.S. bank and 8th largest in the world. The holding company made $29.9 billion in operating income and just over $20 billion in net income for 2011. So, this initial loss of $800M represents approximately 4% of its total net profit for all of 2011, less than 2.7% of its operating income.”

The firm, in other words, can manage it. Though as Brad DeLong was quick to point out, tallying the direct losses misses the episode’s larger impact on the firm’s value. “The revelation that JPMC did not have control over its derivatives book–even though accompanied by promises of multiple firings and deep reforms–destroyed 1/7 of JPMCs franchise value.” Turns out the market doesn’t much like it when what’s reputed to be the safest bank on Wall Street turns out to be incompetent.

Jared Bernstein draws out the larger lesson nicely, and so I’ll quote him at some length. “The fundamental truth here is the one known since Adam (Smith, that is) and amplified by the great financial economist Hy Minsky: humans underprice risk. Their proclivity to do so increases as the business cycle progresses and confidence takes over (remember, JPas bet was unwound by the fact that the economy wasnat as strong as they thought). The advent of a global derivatives market with notional trades in the trillions greatly amplifies the risks.”

“The fact that humans like Jamie Dimonahe who presided over JPas self-proclaimed ‘fortress balance sheet’ahe who inveighed against financial reform as imposing unnecessary oversight on such skilled risk managers as he and his staffafall prey to this fundamental truth only underscores the lesson of this episode in financial hubris.”

“And that is this: financial markets are inherently unstable. They will neither self-correct nor self-regulate. Their instability poses a threat to markets and economies and people across the globe. Therefore, they need to be regulated. Thatas not to say that anyone knows the best way to do this yet in order to balance the necessity of oversight with the dynamics of the markets. We donat know where to set the speed limits. It must be an iterative process. But we do know they need to be set, and JPas loss should be taken as a warning that our tendency is to set them too low.”

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RCP Obama vs. Romney: Obama +2.0%; 7-day change: Obama -0.3%.

RCP Obama approval: 48.0%; 7-day change: +0.7%.

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Top stories

1) Euro zone leaders are seriously discussing a Greek exit. “Eurozone central bankers have talked publicly for the first time of managing a possible Greek exit from Europeas monetary union as stalemate in Athens talks on a coalition government raises the prospect that Greece will renege on the terms of its international bailout. The comments by members of the European Central Bankas governing council indicate that the risk of eurozone fragmentation is being taken increasingly seriously by the regionas policymakers. They mark a significant shift at the ECB, which has previously argued that European treaties do not allow for an exit and that a break-up would cause incalculable economic damage.” Ralph Atkins in the FT.

Greece is headed towards new elections. “Greece appears headed to new parliamentary elections next month, further delaying its efforts to meet international demands to overhaul its economy, after leaders of the countryas major political parties declared little hope Sunday for a last-ditch effort to form a coalition government…Greek President Karolos Papoulias met with politicians Sunday in an effort to construct a unity government that could guide the country through the bailout program, and he planned to continue discussions Monday. But with top leaders expressing little hope for compromise after a week of efforts, it appeared likely that Papoulias would be forced to call new elections, most likely for June 10 or 17. Hopes for compromise have rested on Alexis Tsipras, the leader of the anti-bailout Coalition of the Radical Left Party, also called Syriza…But Tsipras has refused to go along with the pro-business New Democracy party, which won 19 percent of the May 6 vote, and the Socialists, who won 13 percent.” Michael Birnbaum in The Washington Post.

KRUGMAN: “weare talking about months, not years, for this to play out.”

@TheStalwart: Weird. As @renovatio_news points out, #quediceKrugman (What Krugman Says) is trending in Spain. http://twitpic.com/9ktvbo

2) Wall Street looks the same to voters. The giant $2 billion trading loss at JPMorgan Chase highlights a central problem in President Barack Obamaas case for a second term: Four years after the financial crisis nearly brought the nation to its knees, very little appears to have changed. No high-profile bank executives are in jail. Special multi-agency task forces to go after financial fraud and mortgage market abuses appeared in State of the Union addresses, only to issue a few news releases and mostly vanish from public view. And now one of the largest banks in the United States, headed by a Democrat and operating with government guarantees, has turned in the kind of headline-grabbing, casino-style style loss that drives voters crazy and that Obamaas financial reform bill was supposed to stop. Ben White in Politico .

JPMorgan Chase has been lobbying to make exactly the kind of trades that just lost the company billions of dollars. “Soon after lawmakers finished work on the nationas new financial regulatory law, a team of JPMorgan Chase lobbyists descended on Washington. Their goal was to obtain special breaks that would allow banks to make big bets in their portfolios, including some of the types of trading that led to the $2 billion loss now rocking the bank. Several visits over months by the bankas well-connected chief executive, Jamie Dimon, and his top aides were aimed at persuading regulators to create a loophole in the law, known as the Volcker Rule. The rule was designed by Congress to limit the very kind of proprietary trading that JPMorgan was seeking…The loophole is known as portfolio hedging, a strategy that essentially allows banks to view an investment portfolio as a whole and take actions to offset the risks of the entire portfolio. That contrasts with the traditional definition of hedging, which matches an individual security or trading position with an inversely related investment — so when one goes up, the other goes down.” Edward Wyatt in The New York Times.

The real response to JPMorgan Chase’s loss may come from global regulators, not the Volcker rule. “The size and scale of the surprise $2bn loss at JPMorgan Chase last week is likely to accelerate plans by global regulators to force banks to improve their trading risk models…While initial reactions to the JPMorgan loss last week focused on how it could reshape the US debate over implementing the ‘Volcker rule’ ban on proprietary trading, the misstep by one of the worldas largest banks could have far broader consequences. The Basel Committee on Banking Supervision, which sets global rules, has already sought a replacement for Value at Risk – the main measure of potential trading losses – and looked at additional capital requirements to cover potential damages that are not adequately measured by existing models. That project was seen as a long-term effort when it was announced two weeks ago, but it has now gained urgency and could be pushed through more quickly.” Brooke Masters and Tracy Alloway in The Financial Times.

CONFUSED? Here’s an explainer on JPMorgan Chase’s loss.

@davidmwessel: Barney Frank on JPM: Case that banks don’t need new rules to avoid repeat of ’08 crisis “at least $2 billion harder to make todaya (DJNS)

3) Republican state officials are dragging their feet on setting up exchanges. “In about two dozen states across the country, the insurance marketplaces at the heart of the 2010 health-care law remain in limbo, with Republican governors or lawmakers who oppose the statute refusing to act until the Supreme Court decides its constitutionality…In states with Democratic governors, such as New Hampshire and Minnesota, it is often Republican-dominated legislatures that are causing the hold-up. And in six states where Republicans hold both branches of government, including Kansas and South Dakota, state assemblies havenat even considered laws to establish the marketplaces. Though the battles primarily break along partisan lines, there have been at least a half-dozen exceptions. Last spring, the Republican governor of Nevada chose not to stand in the way of an exchange bill adopted by the majority Democratic assembly.” N.C. Aizenman in The Washington Post.

4) Congressional transportation bills won’t fill America’s infrastructure funding shortfall. “The nationas population is growing at a steady pace, yet infrastructure investments lag. The lifelines of commerce — roads, bridges, runways, ports — are showing their age, and in this era of fiscal austerity it may be a long time before they get rebuilt…The financing fiasco has been well-known for years — in fact, the last transportation bill, enacted in 2005, ordered up a blue-ribbon commission tasked with studying the financing problem and making recommendations for how to fix it. The National Surface Transportation Policy and Revenue Study Commissionas final report, issued in January 2008, a year before the last transportation bill was to expire, recommended that the country needs to be investing at least $225 billion annually from ‘all sources’ for the next 50 years in order to upgrade infrastructure to a state of good repair and make transportation advances. The Senateas current transportation bill, in comparison, would fund highways and transit at $109 billion over two years.” Kathryn Wolfe in Politico.

Top op-eds

1) BAKER AND HASSETT: We need a targeted response to long-term unemployment. “Policy makers must come together and recognize that this is an emergency, and fashion a comprehensive re-employment policy that addresses the specific needs of the long-term unemployed. A policy package that as a whole should appeal to the left and the right should spend money to help expand public and private training programs with proven track records; expand entrepreneurial opportunities by increasing access to small-business financing; reduce government hurdles to the formation of new businesses; and explore subsidies for private employers who hire the long-term unemployed. Those who hire for government jobs must do their share, too: managers who are filling open positions should be given explicit incentives to reconnect these lost workers. Every month of delay is a month in which our unemployed friends and neighbors drift further away.” Dean Baker and Kevin Hassett in The New York Times.

@davidfrum: “50 to 100% increase in death rates for older male workers in yrs immediately following a job loss”

2) YGLESIAS: America is headed towards default. “House Republicans voted to take money away from programs meant to help poor people and give it to the military instead. Thatas not my idea of wise policy, but thatas what was terrible about it. The problem is that the vote constitutes a collective Republican welching on the agreement that was reached last spring to raise the statutory debt ceiling and avoid national default. Yesterdayas vote doesnat undo the deal or cause any immediate problems, but by so speedily backing out of their agreement, the Republicans have done something much worse–made it impossible for anyone to negotiate with them in the future, because itas clear they cannot be trusted to keep the promises they made. If President Obama wins re-election, the debt-ceiling issue will have to be confronted again, but now in a Congress that has been poisoned by the Republicansa welching on the last agreement. The country, in other words, is set for an even more severe version of the crisis that crushed financial markets last summer.” Matthew Yglesias in Slate.

3) KRUGMAN: JPMorgan Chase’s loss proves the need for bank regulation. “Banks are special, because the risks they take are borne, in large part, by taxpayers and the economy as a whole. And what JPMorgan has just demonstrated is that even supposedly smart bankers must be sharply limited in the kinds of risk theyare allowed to take on. Why, exactly, are banks special? Because history tells us that banking is and always has been subject to occasional destructive ‘panics,’ which can wreak havoc with the economy as a whole…So what can be done? In the 1930s, after the mother of all banking panics, we arrived at a workable solution, involving both guarantees and oversight. On one side, the scope for panic was limited via government-backed deposit insurance; on the other, banks were subject to regulations intended to keep them from abusing the privileged status they derived from deposit insurance, which is in effect a government guarantee of their debts.” Paul Krugman in The New York Times.

@Austan_Goolsbee: #lettersyouwontsee: Dear Mr. Volcker, you were right all along. we’re now fixing things and won’t let it happen again. yours, wall St.

4) SLOAN: JPMorgan Chase doesn’t prove the need for the Volcker Rule. “The Volcker Rule, named for former Federal Reserve chairman Paul Volcker, is an example of the problem involved in regulating giant companies in a complex world. The principle sounds wonderful and simple: Donat let banks use federally insured deposits for risky trades. But implementing it is proving to be incredibly difficult, as realists, including me, predicted would happen. Once bank lawyers finish finding loopholes in the detailed provisions, whatever they prove to be, the rule will probably have little meaningful impact. So bash Morgan all you like for its trading losses, and feel free to snicker at the spectacle of Jamie Dimon losing his swagger and having to eat crow. But donat confuse Morganas mess-up with the supposed need for the Volcker Rule. The Volcker Rule would have symbolic impact, by appearing to rein in Wall Street. But it will prove to be more useful as a full-employment act for loophole specialists than for reining in the banks.” Allan Sloan in The Washington Post.

5) SNOW: Tax cuts on dividends and capital gains should stay. “Nine years ago this month Congress passed President George W. Bush’s Jobs and Growth Tax Relief Reconciliation Act. That bill’s lower rates on capital, as well as the continuity in tax policy it established, have helped make our economy far more resilient. The legislation’s centerpiece was a reduction in the taxation of dividends and capital gains to 15%. Unfortunately, the 2003 tax rates, including those on capital income, are due to expire at the end of the year. Capital warrants special tax treatment because of the central role it plays in generating economic growth and jobs. Capital is the very lifeblood of the market economy, the mainstay of innovation, and the foundation for future prosperity. As more of it is put to work today, labor output and wages will rise tomorrow. An appreciation of that critical relationship should guide how the tax system treats earnings from capital.” John Snow in The Wall Street Journal.

6) THALER: Beware of slippery slope arguments on healthcare. “One pernicious category of imaginary risks involves those created by users of the dreaded ‘slippery slope’ arguments. Such arguments are dangerous because they are popular, versatile and often convincing, yet completely fallacious. Worse, they are creeping into an arena that should be above this sort of thing: the Supreme Court, in its deliberations on health care reform…Justice Scalia is arguing that if the court lets Congress create a mandate to buy health insurance, nothing could stop Congress from passing laws requiring everyone to buy broccoli and to join a gym…Please stop! The very fact that a slippery slope is being cited as grounds for declaring the law unconstitutional — despite that ‘significant deference’ usually given to laws passed by Congress — tells you all that you need to know about the argumentas validity. Can anyone imagine Congress passing a broccoli mandate law, much less the court allowing it to take effect?” Richard Thaler in The New York Times.

Top long reads

Jeffrey Toobin on how John Roberts orchestrated Citizens United: “Citizens United is a distinctive product of the Roberts Court. The decision followed a lengthy and bitter behind-the-scenes struggle among the Justices that produced both secret unpublished opinions and a rare reargument of a case. The case, too, reflects the aggressive conservative judicial activism of the Roberts Court. It was once liberals who were associated with using the courts to overturn the work of the democratically elected branches of government, but the current Court has matched contempt for Congress with a disdain for many of the Courtas own precedents. When the Court announced its final ruling on Citizens United, on January 21, 2010, the vote was five to four and the majority opinion was written by Anthony Kennedy. Above all, though, the result represented a triumph for Chief Justice Roberts. Even without writing the opinion, Roberts, more than anyone, shaped what the Court did. As American politics assumes its new form in the post-Citizens United era, the credit or the blame goes mostly to him.”

Andrew Martin and Andrew Lehren on the skyrocketing cost of college: “With more than $1 trillion in student loans outstanding in this country, crippling debt is no longer confined to dropouts from for-profit colleges or graduate students who owe on many years of education, some of the overextended debtors in years past. Now nearly everyone pursuing a bacheloras degree is borrowing. As prices soar, a college degree statistically remains a good lifetime investment, but it often comes with an unprecedented financial burden. Ninety-four percent of students who earn a bacheloras degree borrow to pay for higher education — up from 45 percent in 1993, according to an analysis by The New York Times of the latest data from the Department of Education. This includes loans from the federal government, private lenders and relatives. For all borrowers, the average debt in 2011 was $23,300, with 10 percent owing more than $54,000 and 3 percent more than $100,000.”

’90s nostalgia interlude: Nine Inch Nails play “The Becoming” in studio..

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

Still to come: Wholesale prices are down; rebates will be credited to the ACA; Secure Communities expands; the IEA doesn’t like Obama’s plans; and cats, in slow motion.

Economy

Europe’s woes could hit the U.S.. “During bouts of European turmoil in the past two years, U.S. financial markets regularly stumbled and growth ebbed due to fears of a euro-zone meltdown. But Europe muddled through and avoided calamity, and the effects on the U.S. economy weren’t all bad. U.S. exports to Europe rose, and many U.S. banks benefited as overseas competition fell away. Now, the troubles in the currency union–the threat of a Greek exit from the euro zone, rising borrowing costs in Spain and Italy, recessions in several European countries–are renewing fears of an escalating crisis that could deliver a more serious blow to the fragile U.S. recovery. U.S. companies are bracing for a hit. Networking giant Cisco Systems Inc. last week blamed worries about Europe, along with other uncertainty, for its cautious outlook. Watchmaker Fossil Inc. reported a slowdown in German sales on top of deeper pullbacks in Italy and Spain. Chemicals firm Celanese Corp. attributed its disappointing results to weakening European demand.” Sudeep Reddy in The Wall Street Journal.

Wholesale prices declined for the first time this year. “U.S. wholesale prices declined for the first time this year, suggesting a drop in energy costs is helping to keep inflation under control. The index of producer prices, which measures how much wholesalers and manufacturers pay for goods and materials, fell a seasonally adjusted 0.2% in April from a month earlier, the Labor Department said Friday. The decline, the first since December, was due entirely to cheaper prices for energy goods, including gasoline and utility gas…The report on producer prices suggests inflation is subdued, after a run-up in oil prices earlier this year pushed costs beyond the Federal Reserve’s annual inflation target of roughly 2%. Lower inflation could reassure Fed officials as they keep a key interest rate exceptionally low through late 2014 to stimulate the economy. Lower inflation also gives the Fed more room to act, perhaps through additional bond purchases, if economic growth falters.” Josh Mitchell in The Wall Street Journal.

@BobCusack: “Where are the jobs?” references (from both parties) in the Congressional Record between ’09-’12: 357. Between ’05-’08: 3.

Vintage bicycle manufacturing tutorial interlude: How a bicycle is made.

Health Care

Insurers will be required to credit premium rebates to Obamacare. “Health-insurance companies must tell customers who get a premium rebate this summer that the check is the result of the Obama administration’s health-care law, according to federal guidelines released Friday. The move is the latest sign the Obama administration is trying to draw attention to the law’s benefits before the fall elections, even though the law faces an uncertain future. The Supreme Court is expected to decide in June whether its central plank–a mandate that everyone carry insurance–violates the Constitution. Mitt Romney, the presumed Republican presidential nominee, has pledged to wipe out the law if elected. Under the 2010 legislation, insurers that don’t spend a specified amount of revenue on actual medical care–as opposed to administrative costs–must refund the difference to customers.” Louise Radnofsky in The Wall Street Journal.

Domestic Policy

The Senate cybersecurity bill is running into privacy concerns. “Thereas yet another hurdle for Sen. Joe Liebermanas cybersecurity bill: Democrats who say it doesnat go far enough to protect consumer privacy. With Senate Republicans standing firm against the measure, the friendly fire from Democrats means thereas only more work ahead as Lieberman and others scramble to cobble together 60 votes to move the bill. A handful of members, including Sens. Al Franken of Minnesota and Richard Blumenthal of Connecticut, are echoing the concerns of civil liberties groups, which are growing increasingly fearful that consumersa data could end up being passed around by companies and the government as security experts share with each other information about emerging cyberthreats. To them and others, the Senate measure as written would specify too few limitations on how data could be used and cover entities with too broad a protection from liability.” Tony Romm and Jennifer Martinez in Politico.

The Obama administration will expand the controversial Secure Communities program. “Obama administration officials have announced that a contentious fingerprinting program to identify illegal immigrants will be extended across Massachusetts and New York next week, expanding federal enforcement efforts despite opposition from the governors and immigrant groups in those states. In blunt e-mails sent Tuesday to officials and the police in the two states, Immigration and Customs Enforcement officials said the program, Secure Communities, would be activated ‘in all remaining jurisdictions’ this Tuesday…Last year, officials at the agency said they had determined that they did not require consent from states to start the program. Citing antiterrorism legislation that Congress passed in 2002, the officials canceled agreements they had signed in 40 states and said they would extend the program nationwide by 2013.” Julia Preston in The New York Times.

Minority contracts fell last year for the first time in a decade. “U.S. government contracts to black-and Hispanic-owned small businesses fell last year for the first time in a decade, declining at a sharper rate than awards to all companies. Contracts to the black-owned firms dropped 8 percent to $7.12 billion in the fiscal year that ended Sept. 30, compared with fiscal 2010. Awards to Hispanic-owned businesses decreased 7 percent to $7.89 billion, according to federal procurement data.Contracts to the two minority groups fell at a faster pace than all contracts, which dipped 1 percent as the U.S. government slowed spending to help reduce the federal deficit. The gap may reflect stiffer competition over a shrinking pool of revenue and the recessionas greater impact on black and Hispanic firms…The absence of these set-aside programs may help explain the dip in awards for some minority groups, said James McCullough, who leads the government contracts practice at Fried Frank Harris Shriver & Jacobson in Washington.” Danielle Ivory in The Washington Post.

Cuteness amplified interlude: Cats in slow motion.

Energy

Fracking is sparking a boom in sand mining. “Scouts armed with geological maps and elevations from Google Earth are knocking on doors in the upper Midwest in search of what seems too common to mine: sand. The sedimentary material is in high demand among U.S. oil and natural-gas producers, setting off a sand rush in Wisconsin, Minnesota and other Midwestern states. While adding jobs, the mining boom is prompting pushback from some local residents, who are surprised by the frenzy and leery of its impact on their communities. Sand mined in the Midwest is used in places such as North Dakota and Pennsylvania to tap oil and gas reserves. The U.S. producers’ demand for sand reached 28.7 million tons in 2011, up from six million tons in 2007, according to independent laboratory PropTester Inc. and consultancy Kelrik LLC…Sand, injected deep underground to prop open fractures in shale formations and allow oil and gas to flow out, is important in ‘fracking.’” Mark Peters and Isabel Ordonez in The Wall Street Journal.

Lawmakers are torn on how to use high-speed rail funds. “As roads become more crowded each year, transportation planners have been looking for a game-changer that can reduce congestion and efficiently move millions of people. Enter rail — a centuries-old mode that may be a shining savior to those hoping to push the United States into a new way of getting people around at high speeds. But it wonat work everywhere — a lot depends on simple geography. And lawmakers are torn between how to use limited funds: along the densely packed East Coast, which has a history of commuter rail, or out West, where California has ponied up billions of dollars to build a high-speed system, much of it from scratch. Amtrakas Acela service from Boston to Washington runs the fastest trains in the country, maxing out at 150 mph and increasing soon to 160 mph…Three thousand miles away, California is inching ever closer to its high-speed rail vision, having formally approved the initial Central Valley route.” Burgess Everett and Adam Snider in Politico.

The IEA has concerns about Obama’s plans to increase oversight of oil markets. “Barack Obamaas plans for strengthened supervision of the oil markets have come under fire from the International Energy Agency, which has warned they could lead to sharp swings in crude prices. The warning, contained in the agencyas monthly oil market report, came in response to moves by authorities in the US and Europe to crack down on what they see as excessive speculation in commodities markets using derivatives. The US presidentas proposal to give the Commodity Futures Trading Commission authority to direct exchanges to raise margin requirements to address increased price volatility or prevent excessive speculation or manipulation could have the opposite effect, the western countriesa oil watchdog said on Friday. The IEA said raising margin requirements in oil futures trading might increase price volatility and concentrate market share in the hands of large speculators while having no effect on price levels.” Guy Chazan in The Financial Times.

America is running out of helium. “Sure, Congress has plenty of crises to deal with: a weak economy, an expiring highway bill, the end-of-the-year ‘taxmageddon.’ But now thereas another one floating into view. The United States is running out of helium. Yes, helium. Thanks, in part, to a 1996 law that has forced the government to sell off its helium reserves at bargain-bin prices, the countryas stockpile of the relatively rare and nonrenewable gas could soon dwindle…Congress is slowly grasping the extent of the problem. At a sleepy Senate hearing Thursday morning, the Energy and Natural Resources Committee listened to an array of experts chat about the gas. The hearing was tied to a bill, sponsored by Sens. Jeff Bingaman (D-N.M.) and John Barrasso (R-Wyo.), that would change how the government sells helium from its Federal Helium Reserve (yes, this exists) in order to prevent shortages.” Brad Plumer in The Washington Post.

@mattyglesias: Helium Privatization Act is a classic example of inefficient pseudo-privatization gone horribly wrong

Wonkbook is compiled and produced with help from Karl Singer and Michelle Williams.

Hereas the backstory: Since the recession began, many states have been using federal aid to offer up to 99 weeks of unemployment insurance. In February, Congress agreed to reauthorize this program for one more year, but with less aid. States have since been cutting back the number of weeks they provide benefits. The National Law Employment Project has been tracking all the state cutbacks in this chart. All told, some 409,000 workers have lost benefits in 2012 a and most of them have been unemployed for longer than 70 weeks.

These days, fewer and fewer jobless workers are receiving government aid. According to NELP, two-thirds of all jobless workers qualified for state or federal unemployment insurance in 2010. Last year, that number shrunk to 54 percent. This year, it will go below 50 percent. If Congress lets all of its extended-unemployment programs lapse at the end of this year, says NELP, then aonly a quarter of jobless Americans will be receiving unemployment insurance.a

Proponents of benefit cuts will sometimes argue that these workers will now be exceptionally motivated to go get hired now that theyave been cut off. But how realistic is that? As economist Mark Thoma argues here, there are still 3.4 job seekers for every opening in the job market. Thatas abnormally high. In fact, itas still higher than at any point in the 2002 recession. And it means that many people answering job ads and sending in resumA(c)s are going to come up empty-handed, no matter how motivated they are.

Whatas more, many of the workers that are now losing their benefits are part of the long-term unemployed a theyave been out of work for at least one year or more. (About 3.9 million workers fall into this category.) Economists have compiled plenty of evidence that these workers have the hardest time finding new jobs, either because theyave lost skills and job contacts since being laid off or because employers are leery of hiring people who have been out of work for so long.

aWill cutting unemployment benefits now, as many states are about to do, produce net benefits for the economy?a asks Thoma. aProbably not.a Instead, he notes, many of these workers could well aenter the underground economy, go on long-term disability, or pursue other less than desirable means of supporting themselves.a

And then, last night, JPMorgan Chase announced it had lost $2 billion on some very big, very dumb hedges. For proponents of stricter financial regulation, Dimon’s giant loss is a huge gift. The final version of the Volcker rule is scheduled to be released in the coming months. Dimon swears that these trades would have been compliant with the previous drafts of the Volcker rule. That will give regulators a strong incentive to make sure future trades like these aren’t.

Dimon, for his part, doesn’t see the relevance. aJust because weare stupid doesnat mean everybody else was,a he said on a Thursday conference call. aThere were huge moves in the marketplace but we made these positions more complex and they were badly monitored.a

But the point of the Volcker rule — and of financial regulation more generally — isn’t to punish banks for being evil. It’s to protect the rest of us from banks being stupid. And if the most prudent of the big banks can’t keep itself from being this stupid this soon after the financial crisis, then it’s pretty clear we’re going to need very strong rules to keep them from being stupid in the years to come, when the lessons of the financial crisis have faded more completely.

As Reuters’ Felix Salmon writes, “JP Morgan more or less invented risk management. If they canat do it, no bank can. And no sensible regulator can ever trust the banks to self-regulate.”

Wonkbook dashboard

RCP Obama vs. Romney: Obama +1.5%; 7-day change: Obama -2.1%.

RCP Obama approval: 47.4%; 7-day change: -.7%.

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Top stories

1) A massive bet gone wrong cost JP Morgan Chase at least $2 billion. “A massive trading bet boomeranged on J.P. Morgan Chase & Co., leaving the bank with at least $2 billion in trading losses and its chief executive, James Dimon, with a rare black eye following a long run as what some called the ‘King of Wall Street.’ The losses stemmed from wagers gone wrong in the bank’s Chief Investment Office, which manages risk for the New York company. The Wall Street Journal reported early last month that large positions taken in that office by a trader nicknamed ‘the London whale’ had roiled a sector of the debt markets. The bank, betting on a continued economic recovery with a complex web of trades tied to the values of corporate bonds, was hit hard when prices moved against it starting last month, causing losses in many of its derivatives positions. The losses occurred while J.P. Morgan tried to scale back that trade.” Dan Fitzpatrick, Gregory Zuckerman, and Liz Rappaport in The Wall Street Journal.

The loss is putting the spotlight on the Volcker Rule. “JPMorgan Chaseas $2 billion trading loss, which was disclosed on Thursday, could give supporters of tighter industry regulation a huge new piece of ammunition as they fight a last-ditch battle with the banks over new federal rules that may redefine how banks do business…The centerpiece of the new regulations, the so-called Volcker Rule, forbids banks from making bets with their own money, and a final version is expected to be issued by federal officials in the coming months. With the financial crisis fading from view, banks have successfully pushed for some exceptions that critics say will allow them to simply make proprietary trades under a different name, in this case for the purposes of hedging and market-making. The missteps by JPMorgan could highlight that murky line between proprietary trading and hedging. The bank unit responsible for losses takes positions to hedge activities in other parts of the bank.” Nelson Schwartz in The New York Times.

@lizzieohreally: Dimonfreude.

@BCAppelbaum: If losing $2 billion in your trading operations doesn’t violate the Volcker Rule, is it possible that we might need a broader rule?

@ezraklein: At this point in time, I feel comfortable predicting Jamie Dimon will not replace Tim Geithner as Secretary of the Treasury

2) The U.S. ran a monthly surplus for the first time since 2008. “The federal government posted a budget surplus in April as tax receipts rose, the first month that revenue has outpaced spending in more than three and a half years. The Treasury Department, in its latest monthly budget figures out Thursday, said the government ran a surplus of $59.12 billion during April, compared with a deficit of $40.39 billion a year earlier. Economists surveyed by Dow Jones Newswires had projected a $30.00 billion surplus. The federal government has historically run a budget surplus in April, when many Americans file their tax returns. Over the past 58 years, there have been 44 April surpluses, a Treasury official said. But from late 2008 up until two months ago, the government ran steady deficits amid weaker tax receipts and heavy spending following the financial crisis. The government last ran a monthly surplus in September 2008, the same month that Lehman Brothers Holdings Inc. filed for bankruptcy.” Jeffrey Sparshott in The Wall Street Journal.

@DaveedGR: Obviously, the April surplus is due to taxes coming in. Remarkable that there hasn’t been a surplus in any April since 2008…

3) Republicans may not offer a comprehensive replacement for Obamacare. “Republicans might not offer a comprehensive plan to replace President Obamaas healthcare law if the Supreme Court strikes it down this summer. House Republicans had said they would have a healthcare bill ready to go by the time of the ruling to present a clear alternative to the Democratsa Affordable Care Act. But now, with the high courtas ruling just weeks away, some conservatives are urging the party to abandon that strategy, fearing voters will recoil from another sweeping revamp of the healthcare system…Ditching a comprehensive proposal could also make it easier for Republicans to steer the publicas focus away from popular elements of the Affordable Care Act that are unlikely to make the cut in a GOP plan…But a piecemeal strategy on healthcare could present its own risks. Republicans campaigned in 2010 on ‘repealing and replacing’ Obamaas law, but have struggled to clearly articulate a healthcare platform of their own.” Sam Baker in The Hill.

4) Europe delayed a loan payment to Greece. “Euro-zone governments held back part of a big scheduled loan payment in a warning shot to Greece Wednesday, as outside pressure mounted on the country’s politicians to pull together a pro-euro coalition to take charge of the government. Greece’s euro-zone partners agreed to release only a!4.2 billion ($5.5 billion) in previously agreed financing, to be paid out Thursday, holding back a!1 billion at least until June. That would be paid only if Greece keeps to pledges it made to secure a bailout. With Athens in political turmoil after a fractured result in weekend elections, and a new vote likely by June, German politicians cautioned that further aid could be withdrawn if Greece abandons austerity targets–even if that pushes the country from the bloc…Thursday’s payment is needed for Greece to pay a!3.3 billion it owes the European Central Bank next week. The aid was agreed in March by euro-zone governments as part of Greece’s a!130 billion second bailout program.” Alkman Granitsas, Laurence Norman, and Matthew Dalton in The Wall Street Journal.

5) Almost 250,000 Americans will lose their unemployment insurance this weekend. “More than 230,000 jobless Americans will lose their unemployment insurance by this weekend as reductions in the federal program that provides extended benefits to the long-term unemployed take broader effect. The new round of reductions is hitting eight states this month, meaning that about 400,000 long-term unemployed Americans in 27 states will have been cut off of the federal governmentas extended unemployment benefits program this year, according to an analysis by the National Employment Law Project, which advocates for the unemployed. The cuts stem from a congressional agreement this year that will reduce the maximum duration of unemployment benefits from 99 weeks to 79 weeks as the nationas jobless rate declines. Most states provide 26 weeks of benefits, and the federal government provides the rest, partially through a complicated formula that requires jobless rates to be both high and increasing to reach the benefit limit.” Michael Fletcher in The Washington Post.

6) The House passed the GOP’s sequester replacement bill. “The House approved sweeping legislation on Thursday to cut $310 billion from the deficit over the next decade — much of it from programs for the poor — and shift some of that savings to the Pentagon to stave off automatic military spending cuts scheduled for next year. The legislation has no chance of passing the Senate or of becoming law. The White House issued a stern veto threat, saying the bill would ‘fail the test of fairness and shared responsibility.’ But the legislationas prescriptions and priorities could define the 2012 Congressional elections — and are likely to affect the race for the White House…The billas political sensitivity came through in the 218-to-199 vote. Democrats were united in their opposition. Sixteen Republicans sided with the Democrats, and one Republican voted present. ‘I voted my conscience, and I voted my district,’ said Representative Mike G. Fitzpatrick, a Republican from suburban Philadelphia, who voted no.” Jonathan Weisman in The New York Times.

Top op-eds

1) REICH: J.P. Morgan Chase makes the case for Glass-Steagall. “Ever since the start of the banking crisis in 2008, Dimon has been arguing that more government regulation of Wall Street is unnecessary. Last year he vehemently and loudly opposed the so-called Volcker rule, itself a watered-down version of the old Glass-Steagall Act that used to separate commercial from investment banking before it was repealed in 1999, saying it would unnecessarily impinge on derivative trading (the lucrative practice of making bets on bets) and hedging (using some bets to offset the risks of other bets)…What just happened at J.P. Morgan – along with its leaderas cavalier dismissal followed by lame reassurance – reveals how fragile and opaque the banking system continues to be, why Glass-Steagall must be resurrected, and why the Dallas Fedas recent recommendation that Wall Streetas giant banks be broken up should be heeded.” Robert Reich.

2) KRUGMAN: Talk of structural unemployment is an excuse for inaction. “So now weare in another depression, not as bad as the last one, but bad enough. And, once again, authoritative-sounding figures insist that our problems are ‘structural,’ that they canat be fixed quickly. We must focus on the long run, such people say, believing that they are being responsible. But the reality is that theyare being deeply irresponsible…So whatas with the obsessive push to declare our problems ‘structural’? And, yes, I mean obsessive. Economists have been debating this issue for several years, and the structuralistas wonat take no for an answer, no matter how much contrary evidence is presented. The answer, Iad suggest, lies in the way claims that our problems are deep and structural offer an excuse for not acting, for doing nothing to alleviate the plight of the unemployed…All this talk about structural unemployment isnat about facing up to our real problems; itas about avoiding them, and taking the easy, useless way out. And itas time for it to stop.” Paul Krugman in The New York Times.

3) ALTER: Obama and Romney offer differing views of capitalism. “A more useful distinction may be between venture capitalists and human capitalists. Romney came up as a private-equity investor. Like his party, he believes in his heart that the way forward for the U.S. is to slash taxes for the wealthy even further so that they have more venture capital to invest in businesses. Obama came up as a community organizer. Like his party, he believes in his heart that a great nation must invest in human capital through education, health care and infrastructure…Last week brought a classic example of the differing approaches. The tussle over doubling interest rates for student loans (scheduled for July 1) was a controversy ginned up for the Obama campaign, but it was also an acid test. Democrats wanted to pay for the lower rate with a modest business tax; Republicans responded with plans to scuttle the preventive health-care part of Obamacare, despite much evidence of its efficacy for both people and budgets. ” Jonathan Alter in Bloomberg.

4) CARPENTER AND KNEPPER: Occupational license reform would spur economic opportunity. “Since the 1950s, the number of U.S. workers needing an occupational license–effectively a government permission slip to work–has grown from one in 20 to nearly one in three, according to a 2010 study by Morris Kleiner (University of Minnesota) and Alan Krueger (Princeton). The burdens these licenses impose on would-be workers and entrepreneurs are substantial…The risk of a few bad haircuts seems worth a roll of the dice if the upside is more economic opportunities. But the truth is that consumers are capable of judging the quality of many services for themselves. If lawmakers in Michigan and elsewhere want to help more Americans find jobs, they should start by reducing or removing burdens that do little more than protect some people from competition by keeping others out of work.” Dick Carpenter and Lisa Knepper in The Wall Street Journal.

5) BAKOPOULOS: Greek voters didn’t have a chance to reject austerity without rejecting Europe. “Itas clear that Greeks — derided throughout the Continent as lazy and corrupt, hobbled by the bailout dealas austerity measures and humiliated by the troika (the European Central Bank, European Commission and International Monetary Fund) — have put their trust outside the mainstream…But an election usually asks: who, or what, are you for? Not this one. If voters were given any choice, it was this: either accept the austerity measures or be forced to leave the euro zone. A double bind, this either-or option is unable to give expression to the complexity of both yes to Europe and no to austerity. Just before the vote, the German finance minister issued a warning: If Greek voters did not elect a government that would abide by the terms of the deal, ‘then Greece will have to bear the consequences.’ But the consequences are unclear. Vote correctly, or else. Or else what?” Natalie Bakopoulos in The New York Times.

Top long reads

Binyamin Appelbaum profiles financial blogger Joe Weisenthal: “Weisenthal is often — perhaps more often than anyone else — the first person to describe new data on Twitter. And almost as quickly, he repeats the thought, with a new headline, on Business Insider. When the government reported that only 120,000 jobs were created in March, well below expectations, he quickly rewrote the draft of his tweet: ‘DISASTER: MARCH JOBS REPORT MISSES EXPECTATIONS AT 120K. (Analysts expected +205K)’ A search on Twitter suggests that this, at 8:30 on the dot, was the first line published on the subject. Weisenthal managed to post a complete sentence before one of his main rivals, a blogger whose handle is ZeroHedge, tweeted just this: ’120k.’…And then Weisenthal and his audience moved on to the next thing. Around 10 a.m., he posted a new article. The headline read, ‘FORGET THE JOBS REPORT: The Most Important Number of the Day Hasnat Even Come Out Yet.’”

James Bandler and Doris Burke investigate the struggles of HP: “Dr. Phil could fill a month’s worth of shows just examining HP’s board, whose dynamics have resembled those of rival junior high school cliques more than what is supposed to be a sage guiding force. At times, as we’ll see, HP directors have refused to be in the same room with one another and have accused each other of lying, leaking, and betrayal. Time and again they’ve failed in their choice of CEO — their most important task — selecting a new leader whose most salient trait is that he or she is the opposite of the last one. All of this has impeded the company from tackling the fundamental problem it faces: Simply put, Hewlett-Packard has lost its way. The company is in the midst of an existential crisis. It remains a behemoth, No. 10 on the Fortune 500, with $127 billion in sales last year and $7 billion in earnings. But the trajectory is ominous. Those profits, for example, were 19% lower in 2011 than in the previous year.”

’60s nostalgia interlude: Jimi Hendrix plays “Rock Me Baby” live at Monterey 67.

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

Still to come: CEOs push for deficit reduction; an abortion rights leader is stepping down; low scores on a science exam; oil independence may not be a realistic goal; and bear cubs hop aboard the love train.

Economy

A rise in imports widened the trade deficit. “The U.S. trade deficit widened in March but other data Thursday reflected two conditions that could spur the economic recovery: strong American exports and falling oil prices. The March trade gap expanded 14.1% from February to $51.8 billion, the government said. Growing demand from consumers and businesses for goods and services from abroad, along with high oil prices that have since retreated, sent imports surging 5.2% to a record $238.6 billion. But exports also showed strength, rising at the fastest pace since last summer to set their own record. Despite Europe’s fiscal woes and Asia’s slower growth, the U.S. sent abroad $186.8 billion in goods and services in March, up 2.9% from February. Exports have climbed for the past four months, defying forecasts of slower growth due to the recession in the euro zone. U.S. manufacturers appear to have been helped by a historically weak dollar as well as subdued wage growth at home.” Josh Mitchell in The Wall Street Journal.

The House passed the first appropriations bill of the year. “The House on Thursday approved the first appropriations bill of the year, a measure that spends $51 billion on the Departments of Commerce and Justice, NASA and other related agencies. The spending bill, H.R. 5326, was approved in a 247-163 vote in which eight Republicans voted against it, reflecting opposition to the amount spent in the bill. But it also picked up the support of 23 Democrats…The bill is among the least controversial of the 12 annual appropriations bills but has little chance of becoming law on its own. The White House has said President Obama will veto any and all of the 12 bills until the House renounces the top-line spending level in the overall budget written by Rep. Paul Ryan (R-Wis.). The legislation cuts spending by about 3 percent compared to current levels, which Republicans said shows their ongoing commitment to trim spending. The GOP said spending by agencies covered by the bill has been cut by 20 percent over the last three budget cycles.” Pete Kasperowicz in The Hill.

CEOs are making a new push for a deficit deal. “Top business executives, many of whom sat on their hands during last year’s frantic debate about raising the federal debt ceiling, have begun mobilizing and plan to be more vocal in urging Congress to reach a bipartisan deficit-reduction deal by the end of the year. Executives have been meeting privately with lawmakers, urging them to start laying the groundwork now so they can reach an agreement after the November elections to avoid the large tax increases and heavy spending cuts scheduled to take effect in January. They worry those measures could tip the economy back into recession and create turmoil in financial markets, according to people who have attended some of the meetings. J.P. Morgan Chase & Co. chief executive James Dimon hosted a lunch for several dozen chief executives and two U.S. senators late last month, one of the latest in a series of private meetings aimed at drumming up support for a political agreement.” Damian Paletta in The Wall Street Journal.

Subsides are fueling gains in manufacturing. “As chairman and principal owner of Revere Copper Products, Mr. OaShaughnessy runs one of Americaas oldest manufacturing companies, started by Paul Revere himself, a fact that exerts considerable pressure. As he put it: ‘What kind of a message are you sending to the people of the country if you abandon America?’ But spend a day with him, and a more complex picture emerges. He wonders sometimes about the less patriotic alternative of relocating production to Asia or closing the factory entirely on the ground that Revereas profit margin here is too thin — less than $1 million on $450 million in annual revenue…What staves off those alternatives are labor concessions and a substantial government subsidy, something he and others in the United States say is increasingly important to fuel a nascent recovery in manufacturing…With such support, the key measure of manufacturingas presence in America is ticking upward.” Louis Uchitelle in The New York Times.

@jbarro: Just got woken up. I swear I was in the middle of a dream where I was arguing w/ a reporter about transfer taxes.

Engineering interlude: A real life Mario Kart.

Health Care

The leader of an influential abortion rights advocacy group will step down. “At the end of this year, Nancy Keenan will step down from her post as president of NARAL Pro-Choice America, the countryas oldest abortion-rights advocacy group. The 60-year-old Keenan said she is leaving out of concern for the future of the pro-choice movement — and thinks she could be holding it back.Nancy Keenan will retire as president of NARAL Pro-Choice America at the end of the year. In recent years, Keenan has worried about an ‘intensity gap’ on abortion rights among millennials, which the group considers to be the generation of Americans born between 1980 and 1991. While most young, antiabortion voters see abortion as a crucial political issue, NARALas own internal research does not find similar passion among abortion-rights supporters. If the pro-choice movement is to successfully defend abortion rights, Keenan contends, it needs more young people in leadership roles, including hers.” Sarah Kliff in The Washington Post.

An F.D.A. panel backed the preventive use of a H.I.V. drug. “A drug already used to treat H.I.V. infection should also be approved to prevent it, an advisory panel to the Food and Drug Administration said on Thursday. The recommendation is the first time that government advisers have advocated giving antiviral medicine to healthy people who might be exposed through sexual activity to the virus that causes AIDS. One panelist called approving the drug ‘an amazing opportunity to turn the tide on this epidemic.’ Studies have shown that people who take the medicine, Truvada, every day have a greatly reduced risk of infection. The F.D.A. usually accepts the advice of its advisory panels, which are made up of outside medical experts…Experts say better methods of prevention are needed because there are 50,000 new H.I.V. infections a year in the United States. Several speakers emphasized Thursday that that number had not budged in 15 to 20 years.” Denise Grady in The New York Times.

Domestic Policy

Scores remained low on a national science test. “U.S. eighth graders made modest gains on the latest national science exam, but more than two-thirds still lacked a solid grasp of science facts, according to figures released Thursday that renewed concerns American schools are inadequately preparing children for college and the workforce. The 2011 National Assessment of Educational Progress, an exam administered by the U.S. Department of Education, showed that 32% of students were proficient in science, compared with 30% the first time the new version of the science exam was administered, in 2009…Teachers and education-advocacy groups cite various possible causes for weak scores, including a lack of qualified science teachers, budget cutbacks and a narrowing of the curriculum prompted by the No Child Left Behind law. That 2002 U.S. statute caused schools to be evaluated solely on math and reading tests, which persuaded some to reduce science education.” Stephanie Banchero in The Wall Street Journal.

Congress is considering subsidizing the deductibles on crop insurance. “It’s a deal that most businesses would relish: Buy an insurance policy to cover losses or falling prices, and the government will foot most of the bill. Such an arrangement has been enjoyed for more than a decade by the farmers who grow crops such as corn and soybeans, and the companies that insure them. And it’s about to get even better. The farm bill now before Congress includes a provision — estimated to cost about $3 billion a year — that would help cover the losses farmers suffer before their crop insurance policies kick in. Those losses, termed deductibles, can run in the tens of thousands of dollars for a typical mid-size farm. Supporters say it’s a money saver because it would replace an existing subsidy costing $5 billion a year. That subsidy, known as direct payments, pays farmland owners a set amount regardless of whether they’ve planted crops on the land.” Kim Geiger in The Los Angles Times.

Adorable animals being adorable together interlude: All aboard the (bear cub) love train!

Energy

Oil independence may not be possible. “Over the past few years, the United States has experienced a boom in oil and gas production. And thatas led a few commentators to declare that the country is on the verge of ending its dependence on foreign energy and supply disruptions. Alas, thatas never fully possible…Even if the United States goes further and somehow manages to produce every last drop of the oil and gas it needs to run its economy, the country would still be vulnerable to events in the Middle East, tensions in Iran, strikes in Venezuela and other disruptions in the oil markets…. As the CBO explains, oil prices are set by the global oil market. ‘Disruptions in oil production in one country will cause the world oil market to readjust so that all countries and firms continue to receive oil at the new prevailing price.’ Even if the United States produced 100 percent of its own oil, the price would still go up if rising demand from China outstripped the ability of supplies to keep up.” Brad Plumer in The Washington Post.

@AndrewRestuccia: A lively version of “Chain of Fools” is playing before confernce call with Grover Norquist, Rep. Pompeo, Sen DeMint on energy tax credits

Wonkbook is compiled and produced with help from Karl Singer and Michelle Williams.

What youare seeing there is the unemployment rate and the structural budget deficit across all of Europe. aStructural budget deficita is a technical term: It means the deficit thatas been created by what the government is doing rather than what the economy is doing. If policy were aexpansionarya awhich is the opposite of austere a the structural deficit would rise when unemployment rises, because the government would be spending more to support the economy. Instead, itas falling even as unemployment rises.

Zoom into the country level and you can see this even more clearly. Here is unemployment in Spain, Italy, France, Greece, Portugal, and Ireland. As you can see, itas skyrocketing:

And here are the structural budget deficits for the same set of countries. As you can see, theyare falling:

Thatas austerity. It comes both from spending cuts and tax increases. And it can be expected to reduce economic growth. According to the IMF, which analyzed 173 episodes of austerity, cutting the deficit by 1 percent of GDP can be expected to reduce real incomes by 0.6 percent and raise unemployment by 0.5 percentage points.

All the numbers in this post, by the way, come from the International Monetary Fundas latest data (pdf). Values for 2012 and 2013 are the Fundas estimates.

Wonkbook dashboard:

RCP Obama vs. Romney: Obama +0.2%.

RCP Obama approval: 47.3%.

Top stories

1) Senate Republicans filibustered a student loan bill. “Senate Republicans on Tuesday blocked consideration of a Democratic bill to prevent the doubling of some student loan interest rates, leaving the legislation in limbo less than two months before rates on subsidized federal loans are set to shoot upward. Along party lines, the Senate voted 52 to 45 on a key procedural motion, failing to reach the 60 votes needed to begin debating the measure. Senator Olympia J. Snowe, the moderate Republican from Maine who is retiring, voted present…Republicans say they want to extend Democratic legislation passed in 2007 that temporarily reduced interest rates for low- and middle-income undergraduates who receive subsidized Stafford loans to 3.4 percent from 6.8 percent. But the Republicans would not accept the Senate Democratsa proposal to pay for a one-year extension by changing a law that allows some wealthy taxpayers to avoid paying Social Security and Medicare taxes by classifying their pay as dividends, not cash income.” Jonathan Weisman in The New York Times.

@RBReich: Showdown looming on student loans. Ds want to finance w tax hike on rich, Rs w cut in Obamacare. Prez campaign in miniature.

@sethdmichaels: also, 45>52. as usual.

2) Sen. Richard Lugar of Indiana loses GOP primary to Mourdock .“Republican Sen. Richard G. Lugar of Indiana, a 35-year member of the Senate and one of Washingtonas leading experts on U.S. foreign policy, lost his bid for reelection Tuesday after a conservative backlash inside the GOP denied him his partyas nomination for a seventh term. Lugaras loss a the first for a senator this year a appears to be another victory for the tea party conservatives who roiled the Republican Party in 2010 when they defeated two GOP senators in primaries and knocked off several more establishment favorites in open Senate primaries.” Paul Kane in The Washington Post.

3) The start of the highway bill negotiations dealt a blow to House GOP hopes. “It was a conservative Oklahoma Republican who told the House GOP not to even start. At the beginning of Tuesdayas conference committee negotiations on a transportation reauthorization bill, Sen. James Inhofe threw cold water on any hopes House Republicans had that their Senate colleagues would put up a fight with Democrats on the long-delayed bill, lecturing conservatives from the House on the art of compromise. House Republicans came into the meeting hoping to use Speaker John Boehneras (Ohio) sweeping reform to transportation programs as their negotiating position — despite the fact that Boehner was unable to pass that measure and the highway bill that finally did pass the House did not include most of those reforms…But Inhofe, one of the most conservative lawmakers on the Hill and the ranking member of the Senate Environment and Public Works Committee, made it clear early he would not be backing the play.” John Stanton in Roll Call.

@AndrewRestuccia: Inhofe on transp bill: “Having been ranked as the most conservative [lawmaker] many times, the conservative position is to pass this thing.”

4) Job openings rose in March. “U.S. job openings rose in March, a sign that employers gained confidence heading into the spring. The nation had 3.74 million job vacancies at the end of March, about 5% higher than February and the highest level since July 2008, the Labor Department said Tuesday. The rise was driven in part by growing demand for workers in construction and manufacturing. The rate of hiring, however, was flat–and the government’s broader report on unemployment, released last week, showed that the pace of hiring has slowed since March…Federal Reserve Bank of Richmond President Jeffrey Lacker said Tuesday that the skills mismatch could lead the economy’s long-term, or natural, unemployment rate to be higher than what economists now project, as workers take longer to acquire skills and fill vacancies.” Josh Mitchell and Jeffrey Sparshott in The Wall Street Journal.

@grossdm: oh, and I know you’ll be shocked. Private sector job openings rose 198K in March, while public-sector openings fell 26K

5) HHS’s new rate review authority isn’t having much of an impact. “The Department of Health and Human Services isnat that much of a bully, it turns out. Health insurers flagged by the department for ‘unreasonable’ premium hikes are refusing to back down in the first year of HHSas new rate review authority. The health reform law gave HHS the power to scrutinize ‘unreasonable’ rate hikes in states that didnat have robust review programs. But ‘scrutiny’ doesnat give the department power to actually block the rates from going into effect. HHS can use its bully pulpit to publicly shame insurers whose rates donat pass its sniff test – and HHS has done just that, holding four media calls since November to scold insurers each time itas made a new ‘unreasonable’ determination. Faced with the choice of dealing with some negative press on the national stage or upending their business plan, the four insurers that have been dinged by HHS have all chosen to stick with the business plan.” Jason Millman in Politico.

6) The House rejected several additional spending cuts. “The House on Tuesday evening rejected several proposals to slash spending in a series of votes that pitted younger Republicans against more senior GOP members who argued against further spending reductions. The House voted on seven Republican amendments that would have cut $1.4 billion in additional spending from the 2013 appropriations bill for the Departments of Commerce and Justice, H.R. 5326. Members accepted just one of them — a proposal from Rep. Andy Harris (R-Md.) to reduce funding for a climate website at the National Oceanic and Atmospheric Administration. That amendment saved $542,000, and was approved 219-189. But the rest of the amendments were defeated…The most aggressive proposal came from Rep. Paul Broun (R-Ga.), who submitted language that would have cut 3 percent of all salaries and overhead covered by the bill. That amounted to a cut of $847 million, but was rejected in a 137-270 vote.” Pete Kasperowicz in The Hill.

Top op-eds

1) WOLF: Hollande must force a change of course for the eurozone. “What, then, might Mr Hollande do?…He should give enthusiastic support to the wise recent remarks by Wolfgang SchA$?uble calling for higher German wages. He should then point out that there seem to be only five ways this can end. The first and best would be symmetrical adjustment of the imbalances that built up before the crisis, along with reform in weaker countries. The second would be a permanent transfer of resources from surplus countries to deficit ones. The third would be a painful shift of the eurozone into external surplus – a Germany writ large, so to speak. The fourth would be semi-permanent depressions in weak countries. The last would be partial or total break-up of the eurozone. The only sensible choice is the first. But that is not the path the eurozone is now on. Austerity has to be matched to the realistic pace of adjustment and structural reform.” Martin Wolf in The Financial Times.

2) PORTER: Net neutrality is essential for innovation. “Imagine a network of private highways that reserved a special lane for Fords to zip through, unencumbered by all the other brands of cars trundling along the clogged, shared lanes. Think of the prices Ford could charge. Think of what would happen to innovation when building the best car mattered less than cutting a deal with the highwayas owners. A few years ago, Tim Wu, a professor at Columbia Law School…warned members of the House judiciary committee that this could be the fate of the Internet…Fifty years ago, consumers were allowed to hook up only Bell telephones to their Bell phone lines. But in the 1960s, the F.C.C. and the courts forced the Bells to accept any device that didnat threaten the network. The decision unleashed a torrent of innovation — including the answering machine, the fax and the first device that allowed us to explore what would become the Internet: the modem. Innovation online requires an open playing field, too.” Eduardo Porter in The New York Times.

3) ORSZAG: The super rich face income volatility too. “Over the past three decades, the highest incomes in the U.S. have risen dramatically, and that has appropriately received lots of attention. At the same time, however, these high incomes have also become much more volatile, and that has gone almost unnoticed. Conventional wisdom suggests that low-income households experience the greatest changes in response to macroeconomic conditions — their income falls the most when the economy weakens, and it picks up the most when the economy recovers. That conventional wisdom is in need of some updating. Today, the impact of macroeconomic events on household incomes forms a U-shaped curve — it is greatest at the bottom and the top of the income distribution and smallest in the middle…Since the early 1980s, the income of the top 1 percent has fluctuated more than average over the business cycle, rising five percentage points more per year than the overall average during economic expansions and falling 3.7 percentage points more per year during recessions.” Peter Orszag in Bloomberg.

4) JENKINS: The government is holding back broadband. “Broadband history may be short, but it’s already starting to rhyme. In the early days, what were still known as the Baby Bells were treated as DSL monopolists, forced to resell access to their broadband lines to competitors at cost. Undermined, naturally, was their incentive to invest, especially to push network switches closer to residential neighborhoods, the secret to getting cable-like speeds from the old copper phone network. The result is the world we have today: Cable operators increasingly are the only choice for high-speed fixed broadband in many neighborhoods…But there is no shortage of spectrum; as much spectrum exists as ever has existed. Rather, there is spectrum starvation–a new and fast-growing user, the wireless industry, is being starved of spectrum its customers would willingly pay for because of an archaic government allocation system in which economic logic does not penetrate.” Holman Jenkins in The Wall Street Journal.

5) GLAESER: Americans will continue to have an array of living styles. “How has the Great Recession reshaped America? Does the decline in New Yorkas financial sector herald the ‘demise of the luxury city,’ as Joel Kotkin has recently suggested? Or instead has this watershed meant ‘the death of the fringe suburb,’ as Christopher Leinberger speculates? In fact, none of Americaas diverse living styles is about to perish. Incomes remain highest in the large, well-educated coastal cities, even though Kotkin is right that they remain challenged by the high cost of government. Population growth remains strongest in the car-oriented cities of the Sun Belt…It is a great thing that Americans can opt to live in dense cities or sprawling suburbs. As long as people pay the social costs of their actions, and are not subsidized by policies that artificially favor one living style over another, then it is splendid that we have plenty of options, some with sunshine and inexpensive mass-produced housing and others with high wages and costly apartments.” Edward Glaeser in Bloomberg.

Top long reads

Alison Fairbrother on how an angler and two government bureaucrats may have saved the Atlantic Ocean: “Price is a lifelong striped bass fisherman with no formal training as a scientist. Yet he has spent the last four decades cutting open bass stomachs in a kind of renegade ecological study, charting the precipitous decline of the lowly menhaden. Priceas interest in the species is indirect; menhaden arenat prized by anglers. But they are prized by striped bass. The little fish has historically been the striperas most significant source of protein and calories. In fact, menhaden are a staple in the diets of dozens of marine predators in the Atlantic and its estuaries, from osprey to bluefish to dolphin to blue crab. In a host of undersea food chains, menhaden–also known as pogy and bunker–are a common denominator. They have been called the most important fish in the sea.”

Bluegrass interlude: Old Crow Medicine Show play “Next Go ‘Round” live on WRLT.

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

Still to come: Borrowers face delays; the FDA bill moves forward; Common Core faces a backlash; gas isn’t headed for $4 this summer; and a game of feline tetherball.

Economy

House GOP leaders are cons9200 Connection: close bills. “With an eye toward the legislative calendar, House GOP leaders are considering bundling must-pass spending bills to accelerate the lengthy process of debating them on the floor. In doing so, however, they risk angering conservatives, who note that leadership has long promised an open process so they can offer hundreds of amendments aimed at cutting spending that they can tout on the campaign trail. All of this underscores the quandary Appropriations Chairman Hal Rogers faces in trying to pass his dozen bills before the House adjourns this presidential election year: Short workweeks and pushback from Members of both parties will make it a difficult task to complete…Rep. Tom McClintock gathered 43 House Republican signatories, many from the conservative Republican Study Committee, on a letter sent Tuesday to Speaker John Boehner (R-Ohio) and Cantor asking that appropriations bills be brought to the floor individually.” Daniel Newhauser in Roll Call.

Borrowers looking to refinance mortgages face big delays. “Clogged mortgage pipelines have created headaches for hundreds of thousands of Americans trying to take advantage of low mortgage rates, which averaged 4.05% for the week ending April 27, according to the Mortgage Bankers Association. Those rates have helped thousands of Americans free up cash or retire debt…But considering how far mortgage rates have dropped, the refinancing burst has been lackluster by historical standards. A surge in demand has come at a time when fewer banks control a larger share of the mortgage market than they did before the financial crisis. Banks also are being more careful about whom they lend money to and how they process loans. It now takes the nation’s biggest mortgage lenders an average of more than 70 days to complete a refinance, according to Accenture Credit Services, up from 45 days a year ago.” Nick Timiraos and Ruth Simon in The Wall Street Journal.

The House is set to pass a bill reauthorizing the Export-Import Bank. “A bill to raise the Export-Import Bankas lending cap 40 percent by 2014 will pass the U.S. House today, lawmakers of both parties predict, although Republican leaders arenat formally urging members to support it. House Speaker John Boehner endorsed the measure. Still, many Republicans oppose it, saying the bank distorts free markets by subsidizing loans for export sales. The legislation, H.R. 2072, was negotiated by Majority Leader Eric Cantor, a Virginia Republican, and second-ranking Democrat Steny Hoyer of Maryland…The vote will be conducted through an expedited procedure requiring a two-thirds majority for passage. Republicans control the House with 292 members to 190 Democrats and three vacant seats. If all members vote, the bill will need 289 votes to pass under the streamlined procedure.” James Rowley in Bloomberg.

Donald Layton will be Freddie Mac’s new CEO. “Freddie Mac is preparing to name Donald Layton, the former chief executive of online brokerage E*Trade Financial Corp., as its next CEO, according to people familiar with the matter. The company is expected to announce the hiring as soon as Thursday, these people said. That would end a six-month search for the mortgage giant’s third chief executive in the four years since the government took control of it. Mr. Layton had been considered the frontrunner for the job for more than a month. His appointment is subject to approval by the Federal Housing Finance Agency–which regulates Freddie and its sibling, Fannie Mae–and by the Treasury Department…In Mr. Layton, Freddie and its regulator are selecting a financial-services veteran whom the government has turned to in the past and who is willing to work for much less money than a typical chief executive.” Nick Timiraos and Joann Lublin in The Wall Street Journal.

Hollande disagrees with key partners on structural reform. “When Mario Draghi called a couple of weeks ago for a growth pact to match the European Unionas fiscal austerity drive, FranASSois Hollande, now Franceas president-elect, could barely contain his delight…What got less attention was Mr Hollandeas revealing admission that he did not share Mr Draghias vision, quickly endorsed by Angela Merkel, the German chancellor, that such a growth plan should be focused on structural reforms, such as increasing labour market flexibility. Mr Hollande was not coy about this. ‘Can we really believe that liberalism, privatisations and deregulation, which led us to the financial crisis we are in, will help us get out of the crisis?’ he said…His programme falls well short of embracing the sort of structural reforms called for by Mr Draghi and Ms Merkel, which are currently being introduced in Italy and Spain and are seen by many as essential to revitalising Franceas economy.” Hugh Carnegy in The Financial Times.

Adorable renditions of Shakespeare interlude: Brian Cox teaches a two year-old to recite Hamlet’s soliloquy.

Health Care

Schools may be key to preventing obesity. “Obesity is so entrenched in the U.S. that it would take an intense push by schools, employers, doctors and others to reverse an epidemic that accounts for billions of dollars in annual health-care costs, concluded a report released Tuesday. The report by the Institute of Medicine, an influential independent body that advises the federal government on health policy, recommended requiring at least 60 minutes of physical activity a day in schools and considering excise taxes on sugar-sweetened beverages. It urged food companies to improve nutritional standards for foods marketed to people under 18 years old, recommending that mandatory standards be considered at all levels of government if the companies don’t adopt their own…Schools, in particular, should be a ‘national focal point’ for obesity prevention, because children spend up to half their waking hours and consume as many as half their daily calories there, the report said.” Betsy McKay in The Wall Street Journal.

The FDA user fee bill advanced. “The ‘must-pass’ Food and Drug Administration user fee bill was sent to the full House Energy and Commerce Committee on Tuesday morning on a raft of blown kisses from Democrats and Republicans on the Health Subcommittee. After more than a year of work, at least 10 hearings related to user fees and ‘intense negotiations as recently as last weekend,’ Joe Pitts (R-Pa.), chairman of the subcommittee said its members praised their staffs and one another and passed the bill by unanimous voice vote. It took less than a half-hour. The Energy and Commerce Committee will mark up the bill Thursday. Backers hope to move it to the floor quickly with the goal of getting it wrapped up — or very close to final — before the Supreme Court rules on the health law in late June. Industry sources worry the fallout from the ruling, no matter how it goes, could politicize the otherwise relatively bipartisan legislation and slow down, if not derail, its passage.” Brett Norman in Politico.

Domestic Policy

The Common Core standards are facing pushback. “The Common Core national math and reading standards, adopted by 46 states and the District of Columbia two years ago, are coming under attack from some quarters as a federal intrusion into state education matters. The voluntary academic standards, which specify what students should know in each grade, were heavily promoted by the Obama administration through its $4.35 billion Race to the Top education-grant competition. States that instituted changes such as common learning goals received bonus points in their applications…Conservative lawmakers and governors in at least five states, including Utah and Alabama, recently have been pushing to back out, or slow down implementation, of Common Core. They worry that adoption of the standards has created a de facto national curriculum that could at some point be extended into more controversial areas such as science.” Stephanie Banchero in The Wall Street Journal.

A cyberattack against natural gas pipelines has been under way for months. “A sophisticated cyberattack intended to gain access to US natural gas pipelines has been under way for several months, the Department of Homeland Security has warned, raising fresh concerns about the possibility that vital infrastructure could be vulnerable to computer hackers. The departmentas Industrial Control Systems Cyber Emergency Response Team said recently that it had identified a single campaign behind multiple attempted intrusions into several different pipeline companies since December last year. There was no information about the source or motive for the attack, but industry experts suggested two possibilities: an attempt to gain control of gas pipelines in order to disrupt supplies or an attempt to access information about flows to use in commodities trading…The threat of attacks on IT systems has prompted the US authorities to step up their security efforts in recent years, including the creation of ICS-CERT, designed to protect critical infrastructure.” Ed Crooks in The Financial Times.

The FAA is under fire for its response to safety risks. “The Federal Aviation Administration was slow to respond to serious safety risks highlighted by employees, including air-traffic-control violations and lax airline maintenance, according to a government watchdog. Directing unusually sharp criticism at the FAA and the Department of Transportation, the Office of Special Counsel on Tuesday released documents and findings covering several cases that it said highlighted ‘the recurring nature of the problems’ over the years. The conclusions, according to the report, reveal a pattern of ‘insufficient responses by the FAA’ to resolve urgent safety hazards and internal organizational weaknesses…In a number of instances, according to the documents, it took FAA management years to implement fixes–and sometimes required repeat warning from employees–even after the original hazards were substantiated.” Andy Pasztor in The Wall Street Journal.

Animal athletics interlude: Two cats play an epic game of tetherball.

Energy

The EIA no longer sees gas hitting $4 this summer. “Gasoline prices likely wonat reach a national average of $4 per gallon during the summer driving season, the federal Energy Information Administration (EIA) said Tuesday, walking back earlier predictions. Thatas welcome news for consumers, who have grown increasingly worried about the effect of high gasoline prices on their pocketbooks. EIA, the Energy Departmentas independent statistical arm, predicted Tuesday in its short-term energy outlook that gasoline prices will average $3.79 per gallon during the April-to-September summer driving season. The estimate is 16 cents lower than the average price EIA predicted in April. EIA said at the time that prices at the pump would average $3.95 per gallon during the summer, peaking in May at $4.01 per gallon. In its short-term energy outlook Tuesday, EIA said it lowered its prediction because of ‘falling global crude oil prices over the past month.’” Andrew Restuccia in The Hill.

@Ben_Geman: Coal losing ground. EIA sees power gen. from coal sliding 15% in a12, nat gas increases 24%. But coal forecast to regain some ground in a13

Wonkbook is compiled and produced with help from Karl Singer and Michelle Williams.

In fact, Ryan was moving ahead with a GOP bill that would actually slash programs that aid the poor a proposing a $33 billion cut to food stamps, for instance a to replace automatic reductions of defense spending that were part of Augustas debt-ceiling deal. But House Republicans insist that such cuts actually show a cool-headed, warm-hearted approach to poverty. By battling waste, fraud and abuse in social programs, they explain, Republicans can make the government more effective at helping Americans who are actually in need.

Itas logic that seems hard to argue with: Who, after all, thinks that a lottery winner should be on food stamps for two years after she netted $1 million? The reality is that the new Republican bill does take steps to close loopholes and eliminate redundant programs. But the Republicansa sequester replacement does much more than target waste and fraud in social programs. It cuts aid to those who are legitimately receiving benefits.

At Mondayas budget markup, Republicans firmly rejected the notion that the cuts will actually hurt the poor. aTaking food from children? Not true,a declared Rep. Marlin Stutzman, a freshman Republican from Indiana, sitting at the paper-clogged table where the House committee was finalizing its version of the sequester replacement. His words echoed Ryanas response to earlier attacks from Catholic bishops and activists who accused his budget of acrucifyinga the poor.

As the deliberations dragged into the night, the GOP lawmakers doubled down on their line that they want to give aid to those who qualify, and that their bill simply aims to target scammers gaming the system and bureaucrats oblivious to government waste.

The House GOP proposal adoes not change the eligibility criteria for SNAP one bit,a declared Ryan, who shed his jacket as the meeting wore on. aWhere in the government do we have waste? Should prisoners be getting SNAP benefits? Should lottery winners getting SNAP benefits?…People eligible for the benefits should get them. It shouldnat go beyond that.a

Back at home, the public ahears about lottery winners receiving food stamps, and we sit here hearing about taking food out of the mouths of babes,a added Rep. Tim Huelskamp (R-Kansas).

Ryan is correct that the House Republicansa newest budget doesnat radically reform eligibility standards for programs like food stamps. Rather, the bill accelerates the phase-out of a stimulus program that raised benefits for all food stamp beneficiaries. It was originally scheduled to expire at the end of 2013, but the GOP bill would halt the program immediately, cutting benefits by $57 per month. It would also eliminate a provision that allows states to offer food stamps to Americans whose incomes are just slightly above the limit for assets.

The bill, however, would reduce benefits for nearly all households that receive food stamps a about 44 million in total a and would cut them off entirely for 2 million who are currently qualified for food assistance, according to the left-leaning Center on Budget and Policy Priorities, at a time when unemployment remains above eight percent.

Thereas a legitimate argument about which Americans should receive food stamps and how much they should receive. But the GOP legislation doesnat eliminate fraud or abuse. It eliminates or reduces benefits to Americans who legitimately received them.

The Republicans are also proposing cuts aimed at closing loopholes that both parties agree should be closed. At the hearing, Rep. Tim Huelskamp (R-Kan.) brought a giant check to illustrate a loophole that allows states to spend just $1 on home-energy assistance to get beneficiaries up to $1,560 in food aid from the federal government, as the District of Columbia has recently done.

aThey make people eligible when they arenat qualified….and we canat find 4 percent to cut?a Huelskamp said, waving the check in the air.

The provision was, in fact, originally intended to make needy citizens eligible for more food assistance. It lets poor Americans who already receive aid to heat their homes a through the Low Income Home Energy Assistance Program a get a deduction that helps them qualify for more food aid.

Senate Democrats on the Agriculture Committee have proposed raising the statesa contribution to $10 a year. But House Republicans want to eliminate the provision entirely, which would reduce food stamp benefits for about 1.3 million households by $90 month, according to the Congressional Budget Office.

Republicans do follow through on their promise to reduce what they believe are aduplicative programs.a The bill would cut a job-training program administered by SNAP to food-stamp beneficiaries by 72 percent. The logic is that the government funds many other job-training programs, so this particular one is redundant. But critics point out that itas unclear whether people who had to leave one program after it closed would necessarily find assistance in another program.

House Democrats raised harsh objections during Mondayas markup of the budget bill. aWhy are we picking on food stamps?a Rep. Earl Blumenauer (D-Ore.) asked the room. aWe should not be cutting benefits for 46 million people in order to deal with occasional lottery winner. What are the odds there?a

Blumenauer and his colleagues were pushing for an amendment that would restore the cuts to food aid in the budget bill. And for a split second, he even seemed to win over Ryan. When the clerk asked the budget chairman whether head vote for his fellow lawmakeras amendmentareversing his position on food stampsa Ryan was absorbed in a side conversation and caught unprepared.

aAy aa Ryan suddenly stopped himself. aNo!a He chuckled, smiling at his Democratic colleagues. aAlmost got me, almost got me.a

House Republicans defeated Blumenaueras amendment, 13-19, and passed the rest of the sequester replacement a few hours later.

Ezra, the first year of a presidential term is where legislative agendas are won and lost. Would the GOP still be able to obstruct on the scale that they have or will re-election force them to concede on the major legislative items, tax reform, immigration reform, climate and energy reform. If not, what tools are even available for the President should he return to office with the same congressional make up?

Assuming the GOP still controls the House and keeps it close in the Senate, they could absolutely obstruct on the scale weave seen in recent years. The question is whether theyall want to. You can think of a few reasons they may not.

1) More must-pass items they care about. They donat want all the Bush tax cuts to expire. They donat want the Pentagon to see massive spending cuts. They may not even want to be blamed for a breach of the debt-ceiling.

2) Political rethink: Theyall have just failed to unseat Obama. Theyall likely have suffered some congressional losses. That will mean theyave lost two presidential elections in a row. Political parties often begin a rethink at about that time, and perhaps some in the GOP will start to wonder whether catering to the far right is really serving them so well in general elections.

3) Personal desire. Many legislators do want to legislate. They didnat come to Washington and give up all that time with their families and friends just to write press releases calling Harry Reid a jerk. They put a lot of their aletas get something donea instincts on hold to beat Obama, but that failed, and so maybe theyall want to spend a few years getting something done.

All that said, I think it remains quite likely that cooperation is rare to nonexistent, and that itas just more brinksmanship and missed opportunities. The forces of polarization are strong.

In a second term Obama would no doubt finish his political evolution, with no more elections to win, and move in the direction of legalizing gay marriage, donat you think?

I really donat know. I donat think Obama can legalize gay marriage by fiat, though perhaps Iam wrong about that. If it does have to go through Congress, I think theyad be unlikely to pick that fight unless they really thought they could win it. So while I could certainly see him coming out for gay marriage in clearer terms, I donat know what their legislative calculus will be on the issue.

You mention the possibility of Supreme Court vacancies. What are the odds of Associate Justice Hillary Clinton?

Iave often wondered if this is a job shead want. In certain ways, it would make a lot of sense. And we used to have much more of a tradition in this country of nominating politicians to the Supreme Court (see, for instance, Sandra Day OaConnor). But I donat know whatas in Hillaryas heart on this, or in Obamaas.

One area where there seems to be broad agreement among voters is the dysfunction of the political system, from campaign finance to the legislative process. Even for the politicians themselves, a dynamic in which they are always fundraising/campaigning and then canat bring about any change once theyare elected canat be a fun way to spend oneas time in office. Theoretically, this means that both parties would be interested in improving their own work environment. While there would a disincentive for incumbent lawmakers and the interest groups they represent to just sit back and let this happen, a cleaner political process would ultimately benefit the nation as a whole. How likely is it that Obama and the congressional leadership would give this area more attention during a second term?

This is, to me, one of the key questions of modern politics. The system is bad for both parties. Democrats canat govern smoothly when theyare in the majority, but neither can Republicans. Very few politicians like spending so much of their time raising money. No politicians like the low esteem in which the public holds them. And yet they do nothing about it.

The problem is that the two sides never quite have the same incentives at the same time to change it. Majorities may not like the filibuster, but minorities do. Politicians may not like raising money, but when theyare incumbents, they know their fundraising networks give them an advantage over challengers.

Iave always thought the right way to fix the system would be a bipartisan commission — I know, I know — that sets rules that the two parties agree will go into effect in six years, when no one knows who will control any branch of government.

Can you imagine the firestorm that would erupt if Obama got to appoint a successor to one of the Republican justices? How does Obama get the votes in the Senate?

By appointing a candidate they have trouble opposing. It does seem to be the case that qualified SCOTUS candidates who canat be painted as truly extreme tend to be confirmed. Perhaps that will change. But if Republicans just keep rejecting candidates, I think you could see, in that case, Democrats finish what Sen. Bill Frist started and end the judicial filibuster.

Since the stock market will be affected by Spain and Greece, and the rising price of oil would stifle economic growth, how much is the presidentas re-election out of his hands?

Quite a bit, I think. We vastly overstate the role of campaigns in deciding elections and presidents in driving economies.

Pundits seem to fetishize tax reform. Broaden the base by cutting marginal rates and removing aloopholesa and everything will be fine and dandy. But lobbyists for those loopholes donat disappear. And members of Congress, especially senators, have a great deal of leverage when you need a supermajority to pass anything. So just like after the 1986 tax reform, the loopholes make their way back into the tax code, and eventually youare left with a tax code with many of the same loopholes as before AND lower marginal tax rates. What is the advantage for Democrats for pursuing such an arrangement?

Well, if you can afixa the tax code for 10 or 15 years, I think thatas pretty good. Itas like cleaning out a storm gutter: Yes, itall just fill back up with crud. But you still have to do it.

That said, your broader point is well taken: aReforma always sounds great in theory. It gets very difficult in practice. From where I sit, itas made vastly, vastly harder because thereas no current agreement on how much revenue the tax code should raise. Until thereas some resolution to that question, I donat see how you do tax reform.

One topic I was surprised that you didnat mention was the economy. Assuming that Obama wins with the economy roughly as it is now — growing, but too sluggishly — do you think heas going to attempt any major additional measures? Might the administration use the afiscal cliffa as a negotiating point to obtain additional stimulus, infrastructure spending, or something of the kind? Are there any other significant economic measures that you think they might seek?

I do think you could see infrastructure and related measures included in a taxmageddon deal. But I didnat say much more on major stimulus packages because, while the Obama administration would certainly like to pass the American Jobs Act, Republicans wonat let them. Remember that the question of the piece wasnat so much what ashoulda get done as what awilla get done, or at least tried.

How can you possibly condone Obamaas decimation of American Sovereignty? Another 4 years will be the end of this country as we know it – as it would slink into George Sorosa One-World tentacles. How can you possibly not see how Obamaas gradually eroding our rights and grabbing power for an all-invasive government body, not unlike so many Soc ialistic and Communist regimes? How can you , Mr Klein, be so gullible and blind? You call yourself an educated thinking man? Advocating for another term is treasonous. Are you on George Sorosa payroll?

Posted without comment.

How does the winner of Mourdock/Lugar affect any possible strategy the Obama campaign may have in terms of Indiana? Isnat Joe Donnelly a prohibitive favorite against Mourdock? Iave heard the President plans to fight for the state like he did in a08.

If Mourdock wins, Indiana is more gettable for the Dems, and the party will spend more there. But I think the main effect in Indiana is on other Republicans: If Lugar loses, it shows that the party is still successfully primarying incumbents, and so thereas more reason for Republicans to worry about compromising in the future. That makes it harder to get to any deals.

If the President wins re-election, what are the odds Simpson/Bowles will be brought up in Congress?

Well, it got brought up in the House and soundly rejected. As for the chances that something S-Bish becomes the resolution to aTaxmageddona? Low, but not zero.

You and other congress watchers seem to tiptoe around the obvious and inescapable conclusion of your reporting and analysis: the GOP wants unemployment to remain high because they perceive Obama will be blamed for it. This is the Occamas razor explanation for obstructing stimulus (which they support during GOP administrations) and Fed appointments, but you wonat say it squarely. Why not? What would convince you that the GOP is actively trying to discourage the economy from improving?

More evidence. Everything the GOP does is perfectly consistent with a amotivated reasoninga model of human behavior, in which people sincerely convince themselves of what their personal and group incentives lead them to believe. So, to use a non-economic example, i think Republicans sincerely oppose, and even hate, the individual mandate now, even though it was a Republican policy just a few years ago. The change was triggered by partisanship, but the way it actually functioned is by people convincing themselves that the mandate is terrible, unconstitutional policy.

In general, I think political debates are both much more sincere and much less rational than most folks believe.

Is there a way for Obama to cut defense spending without making Americans feel …unsafe? I always felt like defense cuts would do major help for our budget, but I never hear it brought up.

I think so. Polling seems to suggest the public is much more open to defense cuts than Washington is. And remember, major defense cuts are currently baked into the cake of the sequester. Republicans are going to have to give up a lot to get them out of there.

It seems like the argument against austerity rests on the assumption that theyave drastically cut government spending. David Brooks calls the European austerity apartly mythical.a Does this cause the argument against austerity to lose its legs?

I donat understand this new argument in which austerity is only cuts in spending, not tax increases. But at any rate, Brooks is wrong that the European austerity is mythical. Hereas the Economist on the subject.

Would Obama tackle a comprehensive immigration policy?

Head sure like to. The question is whether the votes will be there.

Do you think thereas any historical evidence to back up Romneyas implication that a 2nd term Obama would be unworried about re-election and therefore unfettered in his agenda? Were there really any big, major, game-changing, history-making policies from Clintonas, Bushas or Reaganas second terms? I think wead have to go back to Nixonas 2nd term environmental acts to really see Second Term Hubris in action.

Yeah, it doesnat make much sense. For one thing, structurally, Obama still has to deal with Congress. For another, he still cares about winning the 2014 midterm, and his party cares about winning in 2016. His legacy will be important to him.

So, in sum, he doesnat have any new powers in his second term that allow him to act more ambitiously, and nor is he actually freed from worrying about the future. Obama in a second term will be a lot like Obama in a first term. The question is what events and political constraints heall be facing.

You mention Lew and Bowles and possible replacements for the departing Timothy Geithner. What are your thoughts on other prominent positions? Do you expect Bernanke to confirmed for another term? Do we know of any other departing secretaries and who would be in line to replace them? What about all the aactinga dept heads? Confirmations were hard in the first term. The second would be MUCH worse if the Dems lose control of the Senate.

I doubt Bernanke will get a third term. Iad be surprised if he even wanted one, on some level. As for confirmations, I wouldnat be shocked to see a major push to streamline the Senate confirmation process, though I donat know what form it will take.

Ezra, you seemed to be suggesting that we need to have a fixed percentage of something (say GDP) that we all aagreea to collect as taxes. Or did I read you wrong? Do you think thatas a good idea?

In context of tax reform, which I think is what youare referring to, you need to know what revenue target youare looking to hit. That is to say, youall have different rates, and youall close different deductions/expenditures, if youare looking to raise 18 percent of GDP than if youare looking to raise 23 percent of GDP.

Iam an independent who can no longer vote Republican mainly because their economic ideology cannot be substantiated by 30 years of data. However, the Democrats, as my only alternative, is very depressing. Anyway, despite the whining we hear from Wall Street, the Obama administration has done very little to bring the cheats and thieves to justice who are responsible for the economic debacle we are recovering from. Frankly, thatas been my biggest disappointment with Obama. Any chance we see perp walks from Wall Street bigshots and Alan Greenspan in a second term? Thanks.

Doubt it.

Ezra, if the Supreme Court puts the kibosh on Obamacare, or even just on some parts of it, how do Obama and the Democrats respond? (As someone whoas been self-employed for many years, I am acutely concerned about this…)

If they overturn the whole thing, which most Court watchers consider unlikely, thereas not much Dems can do. If they only overturn the individual mandate, or the individual mandate and some related provisions, then thereas basically a showdown: the law exists. The money for it will be spent. Dems wonat permit repeal. So either Republicans and Democrats have to agree on some fix or states have to figure out how to run their insurance markets without a national-level individual mandate.

In your column you write that Obama would like to apply Race to the Top to other areas of policy. What do you mean by this?

In previous budgets, the Obama administration has proposed expanding the aRace to the Topa model — in which states are given money in return for reforms — to higher ed, to pre-k, to juvenile justice, to transportation. More on that here.

In August 2005, Raghuram Rajan, an economist at the University of Chicagoas Booth School of Business, predicted the financial crisis. And he did it at possibly the least friendly of venues: a conference of high-powered economists who had convened in part to honor Federal Reserve Chairman Alan Greenspan.

Rajan presented a paper titled aHas Financial Innovation Made the World Riskier?a His answer, put simply, was aYes.a He was dismissed by the assembled masters of the universe. aMisguided,a said Larry Summers. But Rajan was right.

In this monthas Foreign Affairs, Rajan is back with another warning. aThe industrial countries have a choice,a he writes. aThey can act as if all is well except that their consumers are in a funk and so what John Maynard Keynes called aanimal spiritsa must be revived through stimulus measures. Or they can treat the crisis as a wake-up call and move to fix all that has been papered over in the last few decades and thus put themselves in a better position to take advantage of coming opportunities.a

This time, Rajanas comments are being received more favorably. Greg Mankiw, the Harvard economist who advises Mitt Romney, called the essay awise.a Tyler Cowen, the George Mason University economist who runs the popular blog Marginal Revolution, was even more direct: aRajan nails it,a he wrote.

But he is once again on the opposite side of the issue from Summers. This time, however, there has been an unusual role reversal: It is Summers who is trying to rouse an economics profession that has settled into a kind of complacency, and Rajan whose argument is more comfortable to much of the political and economic establishment.

Rajanas commentary is perhaps the clearest manifesto yet from the school of post-recession thought that Iave come to think of as athe long-termers.a The long-termers donat deny the enormous and ongoing human suffering caused by the recession. They donat argue that the best course is passivity. Rather, they argue that thereas not much that we can or should do in the short run, and so we may as well focus on long-run issues such as the design of the tax code and the quality of our schools. (For another example of long-termism, see todayas David Brooks column.)

But as Summers sees it, the short run has a nasty tendency to become the long run. aThe evidence is that cyclical problems harden into structural problems,a he says, abecause people who have been out of work for a year lose their ability to work.a

The longer youave been unemployed, the harder it is to get back into the labor force. aIf youave been unemployed for a few weeks, your chance of finding a job is 30 or 40A percent,a says Michael Reich, an economist at the University of California at Berkeley. aIf youave been unemployed for six months, itas 10A percent.a

Since the recession began, the alabor participation ratea has fallen to levels not seen since 1981. Some of that is older workers retiring. But much of it is discouraged workers giving up on searching for new jobs.

Fewer workers, of course, means less economic growth and lower tax revenue. In a recent study, Summers, alongside Berkeleyas Brad DeLong, showed that in a depressed economy, stimulus measures could pay for themselves if they worked to prevent these kinds of long-term labor crises.

Rajan, of course, agrees that it would be good to address these problems if we could. He thinks it would be great to employ more workers rebuilding the nationas infrastructure, but he doesnat think we can get those projects up and running fast enough to make a difference. He thinks it would make sense to write down much of the housing debt in the parts of the nation that have been hit hardest by the economic crisis, but he doesnat think the politics will permit that. He thinks that as long as the housing market is choking on foreclosures, thereas not much that monetary policy can do, as it mainly works through stimulating demand for housing.

aI donat see great short-term solutions,a he says. aWhen people say austerity is not the answer, fine; if you have great things to spend on, let us know what they are.a

To Summers, though, this fatalism is sober-sounding nonsense. aSurely we can have public employment grow as rapidly as it did during George W. Bush or Bill Clintonas presidency,a he says. aSurely we can have classes across America be as small as they were five years ago. Surely if you put more money into the hands of lower-income people they will spend a substantial fraction of it.a

In a reversal from their earlier debates, it is now Rajanas argument that is easier for the political class to embrace: Proposing more stimulus, or more expansionary Federal Reserve policy, is politically dangerous in a way that calling for education reform simply isnat. But unlike before, we donat have to choose between the two sides.

We could spend more on teachers and classroom repairs now while passing budget cuts and tax increases that really kick in after unemployment has dropped to, say, 7A percent. We could rebuild the nationas infrastructure while doubling down on our education reforms. We could, in other words, make both the short term and long term better. But weare doing neither. And Summers and Rajan, in case youare curious, both oppose that course of inaction.

That’s a reasonable position so far as process goes: Treaties aren’t worth much if they need to be renegotiated after every election. But it’s not a reasonable position so far as policy goes.

The reason for austerity’s deep unpopularity isn’t particularly complicated: It’s not, on any level, working, except perhaps to give the Germans political room to negotiate (inadequate) bailouts. It hasn’t stabilized borrowing costs for the endangered countries. It hasn’t brightened growth prospects for the continent. And it’s proving politically unsustainable, too, as countries vote in new governments who’ve promised to renegotiate the terms of the pact. If the euro zone is going to survive, it needs to try something new.

So what else could the euro zone do? My colleague Brad Plumer has compiled just such a list, and rather than summarize it, I’m going to let you read it in full. So here’s Brad with five policies that various experts have suggested that the euro zone might consider instead, and one that no one wants:

1) More inflation from the European Central Bank. More economic growth would make Europeas problems a lot easier to handle. If Spain and Italy were growing at a healthy clip, their deficits would naturally shrink. One institution that could, potentially, help the euro zone grow faster is the European Central Bank. Hereas Paul Krugman: aThe Continent needs more expansionary monetary policies, in the form of a willingness a an announced willingness a on the part of the European Central Bank to accept somewhat higher inflation.a More inflation would help uncompetitive countries like Spain bring down their costs more quickly, and it would potentially spur more spending and growth.

The problem? Both Germany and Europeas central bank have long been temperamentally hawkish on inflation. Most recently, the ECB declined to cut interest rates, even though the euro zone is tumbling back into yet another recession.

2) More stimulus from euro zone countries that are in sound budget shape. It would be hard for countries like Greece or Spain to borrow money now and spend it on stimulus projects, with the promise of cutting spending later once the economyas improved. As Joe Gagnon told me a while back, thereas no way to make that promise of future austerity credible a unlike in the United States, where thereas lots of policy inertia, future European parliaments can easily undo past pledges. Lenders would likely balk.

But just because Greece, Italy, Spain, Portugal and others have to rein in their budgets doesnat mean everyone in the euro zone necessarily has to follow suit. Joseph Stiglitz, for one, has called on wealthier countries such as Germany to invest more in infrastructure and technology to stimulate Europeas economy. aI hope,a Stiglitz said, athe debate will be what are the things we can do to promote growth rather than how do we strangle each other together.a

3) Open the bailout fund for bigger countries. Right now, Europeas wealthy countries have bailed out smaller peripheral countries such as Ireland, Portugal and Greece. But some commentators think the bailout fund may need to get even bigger a and extend to countries that threaten to haul down the whole euro zone, like Spain.

Hereas Wolfgang Munchau, writing in the Financial Times: aFixing the Spanish crisis will have to start with the banks. a| The only halfway benign solution I can see would involve a European rescue programme for Spain that focuses specifically on the recapitalisation and downsizing of the financial sector. Spain would also need to undershoot the eurozoneas average inflation rate over many years to redress some of the lost price competitiveness. At the same time, the country needs to go easy on austerity.a The trouble, again, is that this will require more money from wealthy countries like France, Germany, the Netherlands, and Finland.

4) Eurobonds. Many individual members of the euro zone have large budget deficits. Spainas is 8.5 percent. Irelandas is 13.1 percent. But if you look at the euro zone as a single entity, things look better. Last year, the euro zoneas deficit was just 4.1 percent of GDP a less than half of the United Statesa. In theory, Europe should be able to borrow money at fairly cheap rates if it could issue a single bond for the entire continent. And that would give the euro zone some breathing room to deal with its current woes. Many Europeans, from politicians like Hollande to commentators like Gavyn Davies, have called for just such a aeurobond.a

But there are all sorts of hitches. If the euro zone had one single bond, then countries like Spain and Italy would see their borrowing costs fall, but countries like Germany and Finland would have to pay more to borrow money. It could also create moral hazard a spendthrift countries would feel less pressure from investors to rein in their debts. The Economistas Ryan Avent recently ran through a few proposals from European think tanks to surmount these problems.

5) More fiscal integration. The euro zone, as weave seen, is made up of a bunch of wildly disparate countries. German workers are much more productive than Spanish workers, for instance. And that makes it hard for Spain to compete as long as itas using a currency, the euro, thatas better-suited for more productive workers in Germany.

One idea, then, has been for the euro zone to do what the United States does and redistribute resources from rich to poor. As James Galbraith explained here, the U.S. has long used programs such as Social Security or unemployment insurance or the TVA to lift up the poorer regions and make sure that states donat implode when they fall into recession. Hollande, for one, has suggested that Europe move in this direction, with wealthier states funding a bigger European Investment Bank that can bankroll industrial projects in poorer countries.

But is that enough? One problem is that thorough fiscal integration could involve some truly colossal sums. Remember, West Germany spent $1.9 trillion over 20 years in an attempt to modernize East Germany. And, because there were no language barriers, millions of East Germans could simply migrate West. Greek and Portuguese workers would have a tougher time doing that.

6) Countries could just start leaving the euro zone. Of course, itas possible that none of the above ideas would work. Germany doesnat exactly sound thrilled with the idea of expending further vast resources to prop up countries like Italy and Spain and Greece.

In that case, itas always possible that individual nations could decide that being part of the euro is an unworkable idea and just leave. Jacob Goldstein explains how this would work for Greece. The country would default on its debt and would no longer have to keep spending money on interest payments. It could also devalue its currency in order to make its exports more competitive. Of course, in the short run, foreign investors would flee Greece, the country would have to slash spending considerably, and its economy would likely collapse.

As Slateas Matt Yglesias writes, aIf Greece tried to exit the [euro] a or more likely was forced out by Spain or Italy cutting the cord a theyad be in for a dose of much more severe austerity. Think about Greek living standards converging with Serbia and Bulgaria.a Still, the fact that itas a painful option doesnat mean itas not an option.

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RCP Obama vs. Romney: Obama +1.0%; 7-day change: Obama -2.1%.

RCP Obama approval: 47.1%; 7-day change: -.5%.

Top stories

1) Germany won’t back down on austerity. “The world will be watching closely when French President-elect FranASSois Hollande meets with German Chancellor Angela Merkel for early clues on how willing the two leaders are to reconcile their approaches to resolving the euro-zone crisis…Ms. Merkel and her government, fearful of popular resistance in Germany, have made clear in recent weeks that they won’t soften their austerity demands embodied in a fiscal pact, a point the German leader reiterated on Monday. ‘We in Germany, and me personally, are of the opinion that the fiscal pact is nonnegotiable,’ Ms. Merkel told reporters at her party’s headquarters in Berlin. ‘I consider the fiscal pact to be right and I think there is a basic process in Europe that we agree that after elections, whether in big countries or little countries, we cannot just put everything up for discussion that was negotiated previously.’” Gabriele Parussini and William Boston in The Wall Street Journal.

2) Greece may be headed towards a repeat election. “Greece is bracing for a repeat general election after its centre-right leader failed to win leftwing support to form a ‘national salvation government’ in the wake of Sundayas inconclusive outcome at the polls…The repeat election would probably take place on June 17, he said…The stalemate puts at risk the timetable for disbursement of Greeceas next loan tranche from its second a!174bn bailout. Despite a recent transfer of a!3.5bn to cover financial emergencies, the country faces being unable to meet pension, salary and debt commitments next month…Antonis Samaras, whose New Democracy party finished first but fell well short of a parliamentary majority, on Monday proposed a coalition of pro-reform parties to ensure Greece remains in the eurozone…But Alexis Tsipras, on a roll after his leftwing coalition Syriza vaulted into second place, almost quadrupling its share of the vote, rejected the offer outright.” Kerin Hope in The Financial Times.

@chrislhayes: The entire post-war European system was designed & constructed to produce economic security and avoid crisis and radicalization.

3) The House GOP’s plan to cut health-care spending rather than defense passed out of the Budget Committee. “House Republicans, seeking to prevent defense-spending cuts at the end of the year, advanced a plan that would instead reduce spending on health-care programs, food aid and other major domestic initiatives of the Obama administration. The bill developed by House Budget Committee Chairman Paul Ryan (R., Wis.) would cut about $261 billion in domestic spending over the next decade and roll back portions of the 2010 health-care law and the Dodd-Frank financial overhaul. It was approved Monday by the House Budget Committee on a 21-9 party line vote and likely will be approved by the House later this week. But it is a dead letter in the Senate because the cuts in the social safety net are anathema to Democrats who control that chamber…A sizable portion of the domestic cuts in the House GOP bill come from programs benefiting the poor, including food stamps, Medicaid, and a child tax credit.” Janet Hook and Damian Paletta in The Wall Street Journal.

@sahilkapur: In Budget hearing, Rep. Doggett (D) holds up sign calling GOP bill “Wreckonciliation”; Camera pans to Paul Ryan grinning from ear to ear.

4) Low expectations greet the highway bill negotiations. “The committee of lawmakers appointed to negotiate a new federal highway bill will meet for the first time Tuesday, beginning their talks amid low expectations for a deal in a charged election-year environment. Many observers, including Transportation Secretary Ray LaHood, have expressed doubt that Congress will pass a multiyear bill before the November election. But leaders of the 47-member panel from both House and Senate say they have a blueprint — hewing closely to their respective chamberas approach — for the talks to defy the seemingly long odds…The talks are likely to center, at least at the outset, on a controversial cross-country pipeline that has emerged as an anti-Obama rallying cry for Republicans. The House version of the transportation and infrastructure bill approves the Keystone XL pipeline to bring Canadian oil sands to Gulf Coast refineries.” Keith Laing in The Hill.

5) Sen. David Vitter is blocking the confirmation of any Fed nominees before the election. “President Barack Obama’s two nominees to the Federal Reserve appear likely to fall victim to a long-running political feud, which would leave the central bank short-handed as it struggles with tough regulatory and monetary policy questions. Republican Senator David Vitter has demanded that the Senate hold a debate before any vote on the nominees, which would require Democratic leaders to muster a super majority to move forward – a hurdle that may be too high to clear. As a result, the Senate may end up abandoning the nominees, Harvard economist Jeremy Stein and investment banker Jerome Powell, and leave a decision on filling out the normally seven-member Fed board until after this year’s presidential election…Leaving the central bank short-staffed deprives it of top-notch monetary policy and financial market expertise that could prove valuable given the stop-and-go nature of the U.S. recovery and economic threats coming from Europe.” Mark Felsenthal and David Lawder in Reuters.

@BCAppelbaum: News of the Vitter hold is like learning the results of an autopsy. The outcome was clear; now we know the proximate cause.

@justinwolfers: I don’t know a single serious economic–left or right–who thinks putting a hold on Stein & Powell is a good idea. I bet you can’t find one.

Top op-eds

1) STIGLITZ: The ECB could pave the way for growth in Europe. “This we should know by now: markets on their own are not stable. Not only do they repeatedly generate destabilizing asset bubbles, but, when demand weakens, forces that exacerbate the downturn come into play…States with balanced-budget frameworks are forced to cut spending as tax revenues fall – an automatic destabilizer that Europe seems mindlessly bent on adopting…Europe as a whole is not in bad fiscal shape; its debt-to-GDP ratio compares favorably with that of the United States. If each US state were totally responsible for its own budget, including paying all unemployment benefits, America, too, would be in fiscal crisis. The lesson is obvious: the whole is more than the sum of its parts. If Europe – particularly the European Central Bank – were to borrow, and re-lend the proceeds, the costs of servicing Europeas debt would fall, creating room for the kinds of expenditure that would promote growth and employment.” Joseph Stiglitz in Project Syndicate.

2) BROOKS: The economy needs structural change, not stimulus. “Many people on the left are having a one-sided debate about how to deal with a cyclical downturn. The main argument you hear from these cyclicalists is that the economy is operating well below capacity. To get it moving at full speed, the government should borrow and spend more. The federal government is now running deficits of about $1 trillion a year. Some of these cyclicalists believe the deficit should be about $1.4 trillion…Other people — some on the left but mostly in the center and on the right — look at the cyclicalists and shrug. Itas not that they are necessarily wrong to bash excessive austerity. Theyare simply failing to address the core issues. The diverse people in this camp — and Iam one of them — believe the core problems are structural, not cyclical. The recession grew out of and exposed long-term flaws in the economy. Fixing these structural problems should be the order of the day, not papering over them with more debt.” David Brooks in The New York Times.

3) KLEIN: Larry Summers is taking on ‘the economy needs structural change, not stimulus” types. “Rajanas commentary is perhaps the clearest manifesto yet from the school of post-recession thought that Iave come to think of as ‘the long-termers.’ The long-termers donat deny the enormous and ongoing human suffering caused by the recession. They donat argue that the best course is passivity. Rather, they argue that thereas not much that we can or should do in the short run, and so we may as well focus on long-run issues such as the design of the tax code and the quality of our schools. But as Summers sees it, the short run has a nasty tendency to become the long run. ‘The evidence is that cyclical problems harden into structural problems,a he says, abecause people who have been out of work for a year lose their ability to work.’” Ezra Klein in the Washington Post .

4) REYNOLDS: Saez and Piketty are wrong about taxes. “The first paper, by Peter Diamond of MIT and Emmanuel Saez of the University of California, Berkeley, appeared in the Journal of Economic Perspectives last August. The second, by Mr. Saez, along with Thomas Piketty of the Paris School of Economics and Stefanie Stantcheva of MIT, was published by the National Bureau of Economic Research three months later…Messrs. Diamond and Saez’s 2011 paper ignores all studies of elasticity among the top 1%, and instead chooses a midpoint of 0.25 between one uniquely low estimate of 0.12 for gross income among all taxpayers (from a 2004 study by Mr. Saez and Jonathan Gruber of MIT) and the 0.40 ETI norm from 30 other studies. That made-up estimate of 0.25 is the sole basis for the claim by Messrs. Diamond and Saez in their 2011 paper that tax rates could reach 73% without losing revenue.” Alan Reynolds in The Wall Street Journal.

5) SACHS: Scandinavian structuralists point the way. “French and Greek voters have rejected Europeas current macroeconomic framework. The headlines cry that voters demand growth rather than austerity. Yet growth is not a policy but an outcome. A vote rejecting the incumbents does not define the policy alternatives…Macroeconomic debates are mostly ideological rather than empirical. This is a shame. The diverse experiences across the OECD economies can clarify a lot about the various schools of thought. Of all the high-income countries, it is the northern European countries, including social democratic Scandinavia and the Netherlands, and social-market Germany, that have the most favorable combination of low budget deficits, high employment, and global competitiveness. Of course the specific challenges and current conditions differ by country, and so too will the best packages.” Jeffrey Sachs in The Financial Times.

Singer-songwriter interlude: Joshua Radin plays “I’d Rather Be With You” live on Smooth Radio.

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

Still to come: Taxpayers could profit from AIG; obesity’s rise will continue; the Senate filled vacant seats at the FCC; the government is set to approve more drilling; and a elephant shows off its talent for the harmonica.

Economy

Consumer borrowing saw its biggest jump in over a decade. “Americans are stepping up their borrowing, possibly a good sign for the economy as households become less determined to whittle debt and more willing to spend. Consumer borrowing on credit cards, car loans, student loans and other types of installment debt grew at a seasonally adjusted 10.2% annual rate to $2.54 trillion in March from February, the Federal Reserve said Monday. Mortgages aren’t included in the tally. March’s climb was the biggest monthly leap since November 2001, when zero-percent financing on car loans touched off a surge in borrowing after the September 11 terror attacks…Economists say it isn’t clear yet whether the shift reflects consumers becoming more confident in a strengthening economy or strained households feeling the need to borrow…Banks appear to have loosened lending standards a bit and may be giving consumers more access to credit.” Josh Mitchell in The Wall Street Journal.

Senate Republicans will filibuster the student loan bill over offsets. “Despite a desire to pass legislation to forestall an increase in student loan interest rates, Republicans are expected to filibuster a Democratic student loan relief measure in a bid to change the offset. ‘Weall defeat cloture on’ the Democratas bill, said Senate Minority Whip Jon Kyl (R-Ariz.). The Senate is slated to vote Tuesday at noon on a motion to invoke cloture, or limit debate, on the motion to proceed to the bill. The cloture motion requires 60 votes to beat back a filibuster and move forward on the measure. Last week, Senate Republicans had signaled a willingness to at least move on to the bill and appeared inclined to give Democrat the 60 votes needed…The Democratic student loan bill would cover the $6 billion cost of preventing the rise in interest rates by eliminating a corporate tax loophole that allows wealthy individuals to pay less in Social Security and Medicare taxes. Republicans oppose the offset because they believe it would hurt job creation.” Humberto Sanchez in Roll Call.

The White House threatened a veto of a spending bill that undercuts the debt-ceiling deal. “The White House on Monday threatened to veto a bill funding the Commerce and Justice departments that is slated to come to the House floor on Tuesday. The House GOP bill provides $51.1 billion in funding, a reduction of $1.6 billion below last yearas level. The top problem for President Obama with the bill is that it is part of an overall effort to cut $27 billion from domestic programs compared to the August debt ceiling dealas Budget Control Act (BCA) while increasing weapons spending…The White House has said that Obama will sign none of the 12 annual spending bills, even if they make it through the Democratic Senate, unless the House GOP abandons its overall budget plans…The veto threat says the bill does not contain enough funding for National Oceanic and Atmospheric Administration (NOAA), Census Bureau, International Trade Administration (ITA), Office of the U.S. Trade Representative (USTR ) and community policy programs.” Erik Wasson in The Hill.

@jonathanweisman: WH makes good on pledge, threatens to veto first spending bill to House floor cuz it is lower than July spending deal, cuts NOAA, COPS, NASA

Taxpayers could make a profit on the AIG bailout. “Taxpayers could make a profit of up to $15.1 billion on the emergency assistance extended to American International Group during the financial crisis, the Government Accountability Office said Monday. The Federal Reserve and the Treasury made available more than $180 billion in aid to the struggling financial giant in 2008…’Based on the composition of the remaining federal assistance to AIG [and] the repayment and recovery progress thus far on all assistance . . . the government could receive total returns of approximately $15.1 billion in excess of the assistance provided, including interest, dividends, and fees,’ the GAO said in its report. The GAO report noted, however, that those gains do not reflect the ‘subsidy costs associated with the assistance.’ The GAO did not calculate such costs, which relate to the compensation the government received in exchange for taking on great risks in 2008.” Zachary Goldfarb in The Washington Post.

Robots are cool interlude: The first successful perching on a human hand by a robotic bird airplane.

Health Care

Obesity is projected to continue its rise. “Obesity in the United States is projected to continue its rise over the next 18 years, extending to 42% of Americans by 2030, according to a study released Monday by the Centers for Disease Control and Prevention. That expected growth in the proportion of obese Americans — up from 34% — contained good news and bad: Obesity’s growth has slowed from the record-setting pace that has marked most of the last three decades; at the same time, the numbers of the severely obese — those carrying 80 or more pounds more than the healthy, normal weight for their height — is expected to grow by 130%. The continued growth in obesity will be expensive, said CDC statisticians: Additional spending on healthcare for Americans who will join the ranks of the obese in the next 18 years was projected to reach $549.5 billion over the next two decades.” Melissa Healy in The Los Angeles Times.

The House is set to begin mark up on the FDA bill. “Congress is quickly moving ahead on a must-pass Food and Drug Administration bill, and so far, negotiators have been able to avert any major controversies. The House Energy and Commerce Committeeas Health Subcommittee is set to mark up its FDA bill Tuesday, and lawmakers are hoping to convene a full-committee markup just two days later. Congress has until Sept. 31 — the end of the fiscal year — to reauthorize the user fees that the FDA collects from drug and medical device companies. The fees have to be renewed every five years, and the reauthorization usually becomes a vehicle for broader policy changes. Energy and Commerce Republicans released their bill Friday, and seemed to steer clear of the biggest potential fault lines — such as proposals to alter the FDAas core mission…The agency would lose a big chunk of important funding if the fees were allowed to run out.” Sam Baker in The Hill.

Domestic Policy

The Senate approved two FCC nominees. “The Senate unanimously approved two nominees to fill vacant seats at the Federal Communications Commission Monday, ending a months-long standoff that left the agency at less than full strength. On Monday, the Senate confirmed Jessica Rosenworcel, a Democrat, and Ajit Pai, a Republican, to fill two empty seats on the FCC’s five-member board. Both are former Senate and FCC staffers who easily got a nod of approval from the Senate Commerce Committee last year after a confirmation hearing. Although neither nominee drew significant criticism from lawmakers, their nominations were stalled for months because of a hold by Sen. Chuck Grassley (R., Iowa), who was upset that the FCC didn’t give him documents related to wireless startup LightSquared…Ms. Rosenworcel will fill a seat left open by former FCC commissioner Michael Copps…Mr. Pai fills a seat left open by Meredith Attwell Baker, who left the FCC to become NBC’s top lobbyist.” Amy Schatz in The Wall Street Journal.

Musical animals interlude: Shanthi the elephant plays the harmonica.

Energy

Gas prices are declining sharply. “Gasoline prices fell for the fifth consecutive week, extending a sharp decline that has eased fears that prices would soon top $4 a gallon at the pump. The average price of regular gasoline dropped to $3.790 a gallon as of Monday, the U.S. Energy Information Administration said, down 3.8% from the 2012 peak of $3.941 reached April 2. Many of the forces that drove gasoline up are reversing, and that is helping bring prices back down, though they still remain near record highs. Tensions over Iran’s nuclear program have eased, while softening economies in the U.S. and Europe have curbed demand. At the same time, some refineries pegged for closure are coming back online, and bottlenecks in the supply of crude oil are becoming unclogged. The changes have led analysts to temper their price predictions for the summer driving season. A few months ago, some were saying pump prices could shoot above $4 a gallon and even reach $5 by the summer, but now they say that is highly unlikely.” Liam Pleven in The Wall Street Journal.

@morningmoneyben: Remember when everyone freaked about gas prices? They are going down. Has Romney claimed credit yet?

Mitt Romney’s EPA might not be the radically different agency he envisions. “Mitt Romney isnat certain about climate change, wants to reverse or halt a handful of the Obama administrationas environmental policies and would put the interests of business — and Congress — before the will of one of the executive branchas most embattled agencies. But what really happens at Romneyas Environmental Protection Agency? Romney may talk a big game, but the reality is heall face significant roadblocks in Congress and the courts that may make wholesale change difficult. Moving new environmental legislation — particularly to weaken current laws — would prove difficult at best in such a divided Congress, which struggles to coalesce on nearly anything. And the courts — tasked with interpreting the environmental legislation that is often deliberately vague, complicated and designed to rest on scientific information — can often order the EPA to take action or revise legislation.” Erica Martinson in Politico.

The U.S. is set to approve a substantial natural gas drilling plan. “U.S. officials are expected Tuesday to approve a plan by Anadarko Petroleum Corp. to drill 3,700 natural-gas wells in eastern Utah, capping a yearslong review of a project that will be one of the largest in the region. Approval for the Greater Natural Buttes project in the Uintah Basin, to be announced by Interior Secretary Ken Salazar, comes as the Obama administration is supporting natural-gas production…The Greater Natural Buttes project is the uncommon case in which an energy company won the support of environmental groups, which are often vocal critics of oil and natural-gas development. Anadarko agreed to pull previous proposals to expand drilling to new areas, including parts of a proposed red-rock wilderness area…instead, Anadarko said in its environmental-impact statement, its wells would be drilled from existing wellpads, using technology that allows the well to curve away from a straight-down path and tap new deposits.” Tennille Tracy and Jim Carlton in The Wall Street Journal.

Republicans will attempt to block funding for lightbulb efficiency standards. “A House Republican is planning in the coming weeks to revive the GOP offensive against federal lightbulb efficiency standards. Rep. Michael Burgess (R-Texas) will offer an amendment to Energy Department spending legislation that would block funding for implementation of the standards, the lawmaker’s office told The Hill. The standards have come under fire from conservatives in recent years. Republicans won the inclusion of a similar provision in an omnibus spending compromise that House and Senate lawmakers agreed to in December. The provision blocked funding for implementation of the law for fiscal year 2012. Burgessa amendment would apply to fiscal year 2013…The House Appropriations committee approved the Energy Departmentas fiscal 2013 spending bill late last month. The legislation is expected to come up for a floor vote in the coming weeks.” Andrew Restuccia in The Hill.

Wonkbook is compiled and produced with help from Karl Singer and Michelle Williams.

But muddling through doesnat seem to be working. Voters are now revolting against austerity, especially as the euro zone slides into yet another recession. Countries like Spain are finding that austerity is hurting growth and making deficits harder, not easier, to control. The bailout fund isnat big enough to prop up countries like Italy and Spain if they run into serious trouble borrowing money. And many poorer euro zone countries are finding it difficult to grow and reduce their trade imbalances so long as theyare yoked to a single currency and a central bank that canat cater to everyoneas needs.

So many observers are wondering whether Europe will shift course now that Franceas newly elected president, Francois Hollande, has called for a change. But what else could Europe do? Hereas a list of six policies that various experts have suggested that the euro zone might consider instead:

1) More inflation from the European Central Bank. More economic growth would make Europeas problems a lot easier to handle. If Spain and Italy were growing at a healthy clip, their deficits would naturally shrink. One institution that could, potentially, help the euro zone grow faster is the European Central Bank. Hereas Paul Krugman: aThe Continent needs more expansionary monetary policies, in the form of a willingness a an announced willingness a on the part of the European Central Bank to accept somewhat higher inflation.a More inflation would help uncompetitive countries like Spain bring down their costs more quickly, and it would potentially spur more spending and growth.

The problem? Both Germany and Europeas central bank have long been temperamentally hawkish on inflation. Most recently, the ECB declined to cut interest rates, even though the euro zone is tumbling back into yet another recession.

2) More stimulus from euro zone countries that are in sound budget shape. It would be hard for countries like Greece or Spain to borrow money now and spend it on stimulus projects, with the promise of cutting spending later once the economyas improved. As Joe Gagnon told me a while back, thereas no way to make that promise of future austerity credible a unlike in the United States, where thereas lots of policy inertia, future European parliaments can easily undo past pledges. Lenders would likely balk.

But just because Greece, Italy, Spain, Portugal and others have to rein in their budgets doesnat mean everyone in the euro zone necessarily has to follow suit. Joseph Stiglitz, for one, has called on wealthier countries such as Germany to invest more in infrastructure and technology to stimulate Europeas economy. aI hope,a Stiglitz said, athe debate will be what are the things we can do to promote growth rather than how do we strangle each other together.a

3) Open the bailout fund for bigger countries. Right now, Europeas wealthy countries have bailed out smaller peripheral countries such as Ireland, Portugal and Greece. But some commentators think the bailout fund may need to get even bigger a and extend to countries that threaten to haul down the whole euro zone, like Spain.

Hereas Wolfgang Munchau, writing in the Financial Times: aFixing the Spanish crisis will have to start with the banks. a| The only halfway benign solution I can see would involve a European rescue programme for Spain that focuses specifically on the recapitalisation and downsizing of the financial sector. Spain would also need to undershoot the eurozoneas average inflation rate over many years to redress some of the lost price competitiveness. At the same time, the country needs to go easy on austerity.a The trouble, again, is that this will require more money from wealthy countries like France, Germany, the Netherlands, and Finland.

4) Eurobonds. Many individual members of the euro zone have large budget deficits. Spainas is 8.5 percent. Irelandas is 13.1 percent. But if you look at the euro zone as a single entity, things look better. Last year, the euro zoneas deficit was just 4.1 percent of GDP a less than half of the United Statesa. In theory, Europe should be able to borrow money at fairly cheap rates if it could issue a single bond for the entire continent. And that would give the euro zone some breathing room to deal with its current woes. Many Europeans, from politicians like Hollande to commentators like Gavyn Davies, have called for just such a aeurobond.a

But there are all sorts of hitches. If the euro zone had one single bond, then countries like Spain and Italy would see their borrowing costs fall, but countries like Germany and Finland would have to pay more to borrow money. It could also create moral hazard a spendthrift countries would feel less pressure from investors to rein in their debts. The Economistas Ryan Avent recently ran through a few proposals from European think tanks to surmount these problems.

5) More fiscal integration. The euro zone, as weave seen, is made up of a bunch of wildly disparate countries. German workers are much more productive than Spanish workers, for instance. And that makes it hard for Spain to compete as long as itas using a currency, the euro, thatas better-suited for more productive workers in Germany.

One idea, then, has been for the euro zone to do what the United States does and redistribute resources from rich to poor. As James Galbraith explained here, the U.S. has long used programs such as Social Security or unemployment insurance or the TVA to lift up the poorer regions and make sure that states donat implode when they fall into recession. Hollande, for one, has suggested that Europe move in this direction, with wealthier states funding a bigger European Investment Bank that can bankroll industrial projects in poorer countries.

But is that enough? One problem is that thorough fiscal integration could involve some truly colossal sums. Remember, West Germany spent $1.9 trillion over 20 years in an attempt to modernize East Germany. And, because there were no language barriers, millions of East Germans could simply migrate West. Greek and Portuguese workers would have a tougher time doing that.

6) Countries could just start leaving the euro zone. Of course, itas possible that none of the above ideas would work. Germany doesnat exactly sound thrilled with the idea of expending further vast resources to prop up countries like Italy and Spain and Greece.

In that case, itas always possible that individual nations could decide that being part of the euro is an unworkable idea and just leave. Jacob Goldstein explains how this would work for Greece. The country would default on its debt and would no longer have to keep spending money on interest payments. It could also devalue its currency in order to make its exports more competitive. Of course, in the short run, foreign investors would flee Greece, the country would have to slash spending considerably, and its economy would likely collapse.

As Slateas Matt Yglesias writes, aIf Greece tried to exit the [euro] a or more likely was forced out by Spain or Italy cutting the cord a theyad be in for a dose of much more severe austerity. Think about Greek living standards converging with Serbia and Bulgaria.a Still, the fact that itas a painful option doesnat mean itas not an option.

These comments have been the occasion for much wailing and gnashing of teeth, as if anyone, anywhere, believed that the Republicans’ 2011 debt-ceiling antics were some sort of one-off. But Boehner was clear on Tuesday. “I will again insist on my simple principle of cuts and reforms greater than the debt limit increase,” he said.

Of course he will. For one thing, it worked well for him in 2011. Republicans got more than $900 billion in immediate spending cuts, as well as $1.2 trillion in triggered spending cuts — though they don’t much like the $500 billion or so of those cuts scheduled to fall on the Pentagon. They also drove President Obama’s approval ratings beneath 40 percent. And while I’m not one who thinks Republicans intentionally tank the economy to undermine Obama, there’s little doubt that the effect of the debt-ceiling debacle was to set back the recovery, brightening Republican prospects and darkening Democratic ones. The fact is that it’s easier to be sanguine about economic showdowns when you’re not the ones in charge.

For another, it’s Boehner’s only option in 2012. The Democrats, for once, have nothing but fiscal leverage. They’ve got the expiration of the Bush tax cuts, which all Republicans would hate and many Democrats would welcome. They’ve got the aforementioned spending trigger, which Republicans really have begun to fear for its cuts to defense spending. They can do nothing — or, more likely, offer Republicans a deal they can’t accept — and the resulting paralysis will swing fiscal policy far, far, far to the left. Threatening to default on the national debt is Boehner’s only piece of counter-leverage.

So of course Boehner will try and use the debt ceiling as leverage again. And again. And again. It’s pretty clear that, at this point, there’s no going back to the time when debt-ceiling increases came smoothly. If I were the market, I’d take the fact that the leader of one of the two parties has publicly said that he “welcomes” debt-ceiling showdowns as evidence that the United States is almost certain to default on its debt — if only temporarily — within the next decade or so.

The question is what, aside from complain, Democrats and the business community will do to stop him. Somehow, the debt ceiling needs to be taken off the table once and for all, either because Republicans forced a default in a way that they were blamed for the consequences and scared into never doing it again or because the president successfully pulled off one of the more creative maneuvers suggested during last year’s showdown (Bill Clinton, for instance, argued that Obama should invoke the Fourteenth Amendment — which says “the validity of the public debt of the United States … shall not be questioned” — to raise the debt ceiling unilaterally).

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Top stories

1) Boehner threatened another debt-mageddon “Washington braced Tuesday for a replay of last summeras tense battle over the burgeoning national debt as House Speaker John A. Boehner threatened again to block an increase in the federal debt ceiling without significant new cuts in spending. Treasury Secretary Timothy F. Geithner and other senior Democrats quickly blasted the Ohio Republican, arguing that his ultimatum could put the nationas credit rating — and the broader economy — at risk early next year, when the debt is expected to hit its $16.4 trillion limit.” Lori Montgomery in The Washington Post.

@damianpaletta: Boehner’s debt ceiling “line in the sand” is very similar to what he said last year; Definitely got the attention of White House and D’s

@ObsoleteDogma: Shorter Boehner: Regulatory uncertainty is bad. But default uncertainty is good.

INTERVIEW: Sen. Tom Coburn on defusing the debt bomb.

READ: Mitt Romneyas remarks on the debt.

@MichaelSLinden: As a fiscal policy analyst, I’d like to thank Mitt Romney for offering no specifics whatsoever so I can go home at a normal time tonight.

2) Greece failed to form a new government, triggering new elections. “The threat of a full economic collapse in Greece escalated Tuesday after warring political factions here failed to forge a new government, triggering fresh elections and heightening chances that this rudderless Mediterranean nation could be forced to abandon the euro…A nation in danger of running out of cash to operate the government, and where fearful residents in recent days have been rapidly withdrawing more of their savings from Greek banks, faces uncertain new elections next month. Opinion surveys have shown that Syriza, a party that wants to break the terms of Greeceas bailout deal and that came in a surprise second in the last vote, is polling in first place…European finance ministers — whose taxpayers have largely funded the bailout for Greece — were quick to push back Tuesday. Given the potential shock waves if Greece is forced to leave the euro zone, there have been suggestions in recent days that European officials might show more lenience with Athens.” Anthony Faiola in The Washington Post.

Surging bank withdrawals in Greece sparked fears of a bank run. “Greek depositors withdrew a!700 million ($898 million) from the country’s banks on Monday, fueling fears of a bank run amid the growing political disarray. With deposits falling, Greek banks become even more dependent on the European Central Bank to meet their funding needs, exposing the central bank to potentially huge losses if Greece leaves the euro area. Greek President Karolos Papoulias told the country’s political leaders that bank withdrawals plus buy orders received by Greek banks for German bunds totaled some a!800 million on Monday, a transcript of his comments said. A central bank official confirmed the figures…Monday’s deposit withdrawal far outpaced Greek banks’ steady decline in deposits since the start of the country’s debt crisis in 2009, as depositors withdraw cash and transfer funds overseas.” Brian Blackstone and David Enrich in The Wall Street Journal.

@grossdm: So, Greece is seeking to solves its economic problems through QE — quantitative electioneering

3) The Senate will vote on several GOP budget proposals today. “The Senate on Wednesday will hold six hours of debate and votes on four different Republican budget resolutions, in an apparent attempt to demonstrate that they will not be supported in the Democratic-led Senate. A fifth budget measure up for a vote, from Senate Budget Committee ranking member Jeff Sessions (R-Ala.), is based on President Obama’s budget and is seen as an attempt to embarrass the White House. But Senate Budget Committee Chairman Kent Conrad (D-N.D.) said Tuesday that debate and votes on the GOP proposals would show there is little appetite for these plans. He also said it would give the country a chance to understand that last year’s Budget Control Act already sets spending caps for Congress. Democrats have been under fire for failing to pass any budget resolution…One of the four GOP budget resolutions to be debated Wednesday is H.Con.Res. 112, the budget resolution approved by the House in March.” Pete Kasperowicz in The Hill.

4) The Justice Department started a criminal probe into JPMorgan Chase’s loss. “The Justice Department has initiated a criminal probe into the $2 billion trading loss at JPMorgan Chase, a law enforcement representative familiar with the situation said Tuesday. The inquiry is at a very early stage, said the person, who spoke on the condition of anonymity because the matter is private. Many details about the loss at JPMorgan are murky, so it is unclear what laws, if any, may have been violated. But the attention from federal officials indicates that regulatory pressure is rising on JPMorgan, and its chief executive Jamie Dimon, to explain what exactly led to the bankas multi-billion dollar misstep. That, in turn, has rekindled questions about whether government regulators are equipped to monitor banks making risky, complex trades…Dean Boyd, a Justice spokesman, declined to comment.” Jia Lynn Yang and Sari Horwitz in The Washington Post.

Too big to fail banks have gotten bigger. “JPMorgan Chaseas $2 billion blunder is throwing the spotlight on an awkward truth for President Barack Obamaas promise to end the era of big bank bailouts: The same institutions that were deemed ‘too big to fail’ before the financial collapse are even bigger now. Efforts to manage the size of such institutions were at the heart of the Dodd-Frank financial law passed in July 2010. But nearly two years later, many of the lawas regulations remain in limbo, as federal agencies muddle through long rule-making processes against stiff industry opposition…All the while, the countryas biggest financial institutions continue to grow. The five largest, which controlled $6.1 trillion in assets before the collapse, by the end of 2011 had assets worth $8.5 trillion — equal to more than half of U.S. economic output, according to Federal Reserve data.” Patrick Reis in Politico.

@BCAppelbaum: This whole JPM story underscores one reason we don’t have effective financial regulation: Our public officials don’t understand finance.

Top op-eds

1) PORTER: It’s time for the euro to come to an end. “Social upheaval across the euro area suggests that it may be time to call it quits and try to work out an orderly process to re-establish national currencies throughout the bloc. Europe would be in much better shape if the euro didnat exist and each member country had its own currency. Monetary union has shackled together nations with vastly different economies, depriving them of an independent monetary policy that can help them through rough times. The interest rate and exchange rate that serve Germany also have to serve Spain, though that country has more than four times Germanyas joblessness. The main problem is that while leaders eagerly embraced the monetary bond, they rejected its necessary complement: a central budget that would transfer money from successful regions to underperforming ones, as the United States government sends tax dollars collected in Massachusetts to pay for unemployment benefits in Nevada.” Eduardo Porter in The New York Times.

2) FROST: The FDIC shouldn’t protect investment banks. “I suggest that we divide the two functions into separately owned, managed and regulated entities. That’s the only way we can ensure that their riskier businesses don’t undermine the insured deposits that are the foundation of a stable and healthy economy. Taxpayer safety-net programs, such as the Federal Deposit Insurance Corporation (FDIC), should be available only to banks in business to provide insured deposits. Financial institutions that provide primarily investment, hedging and speculative services don’t deserve protection either by the FDIC’s explicit guarantees or by an implicit understanding that taxpayers will bail them out because there is no other alternative. Indeed, this kind of protection is a perversion of capitalism and can distort its good outcomes…We need a real and impregnable firewall that keeps one part of the banking system–and the economy–from being consumed when the other goes into flames.” Tom Frost in The Wall Street Journal.

3) ROSEN: Competitive bidding can hurt patients. “On the face of it, competitive bidding sounds like a very good idea. If one supplier can provide power wheelchairs or oxygen masks for 30 percent less than another, itas hard to argue for contracting with the more expensive supplier, especially at a time when everyone is looking for ways to save money. A one-year experiment with expanded competitive bidding that was recently conducted by Medicare yielded cost savings of 42 percent, without reducing the quality of care, and was hailed as a great success. But as a doctor working with patients on the ground, I have doubts about that quality-of-care measure, and I worry that those savings obscure a potentially serious problem…If competitive bidding is predicated on supplying equipment at the lowest possible price, something has to give. And more likely than not, that something will be patient care.” Dennis Rosen in The New York Times.

4) ORSZAG: Want good news on jobs? Look to big businesses. “Big business, we keep being told, has been so hampered by regulatory uncertainty over the past few years, it has been reluctant to hire workers. So it is surprising to read the results of a little-known survey from the Bureau of Labor Statistics: Very large businesses, it turns out, have been expanding their domestic workforces relatively rapidly. If, since January 2011, businesses of all sizes had hired at the same rate as those with 5,000 or more employees, we would have almost 4 million more jobs today…The JOLTS data highlight the importance of exploring how the continuing deleveraging process and resultant sluggish growth in demand is affecting smaller businesses in particular. With the percentage of working Americans stuck at a depressed level, we sure could use those extra 2 million to 4 million jobs.” Peter Orszag in Bloomberg.

5) ALEXANDER: Washington should take over Medicaid and let states handle education. “Staring down steep tuition hikes, students at the University of California have taken to carrying picket signs. As far as I can tell, though, none has demanded that President Barack Obama accept a Grand Swap that could protect their education while saving them money. Allow me to explain. When I was governor of Tennessee in the early 1980s, I traveled to meet with President Ronald Reagan in the Oval Office and offer that Grand Swap: Medicaid for K-12 education. The federal government would take over 100% of Medicaid, the federal health-care program mainly for low-income Americans, and states would assume all responsibility for the nation’s 100,000 public schools…If we had made that swap…states would have about $92 billion a year in extra funds, as they’d keep the $149 billion they’re now spending on Medicaid and give back to Washington the $57 billion that the federal government spends per year on schools.” Lamar Alexander in The Wall Street Journal.

Cover interlude: Screaming Females play Sheryl Crow’s “If It Makes You Happy” for the AV Club.

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

Still to come: Free trade with Colombia is in effect; Catholic bishops are close to suing over birth control; backlash against tests is growing; energy independence is within reach; and a puppies’-eye view of life.

Economy

The Senate will vote on two Fed nominees on Thursday. “Senate Majority Leader Harry Reid (D-Nev.) today set up a procedural vote for Thursday on two nominees to join the Federal Reserve whose nominations have stalled because of opposition from Sen. David Vitter (R-La.)…Vitter blocked attempts in March to quickly confirm Harvard University economics professor Jeremy Stein, a Democratic nominee, and former private-equity executive Jerome Powell, a Republican nominee…Asked whether he was confident that he would have the 60 votes to invoke cloture on the nominations, Reid said, ‘Well I sure hope so, weave been waiting months and months.’…Senate Minority Leader Mitch McConnell (R-Ky.) said he believes there is bipartisan support for the nominees…Without the two nominees in place, the Federal Reserve Board will remain short-handed as it attempts to support the economic recovery” Humberto Sanchez in Roll Call.

The dip in gas prices eased inflation. “The recent slide in gasoline prices in the U.S. has pushed the nation’s annual rate of inflation to its lowest level in more than a year, easing some economic strains on consumers. The consumer price index, which measures what Americans pay for everything from breakfast cereal to doctor visits, was unchanged from March to April, ending three months of increases, the Labor Department said Tuesday. A 2.6% drop in the gasoline-price index helped offset rising costs for many other items. Overall prices are now running 2.3% higher than a year ago, the smallest increase since February 2011…The inflation figures have mixed implications for the recovery. Lower gasoline and utility costs are keeping a lid on household expenses, effectively boosting Americans’ spending money. However, prices are climbing broadly, most notably for food, but also medical care, rents, autos and airfares.” Josh Mitchell in The Wall Street Journal.

States are using foreclosure prevention funds to plug budget gaps. “Hundreds of millions of dollars meant to provide a little relief to the nationas struggling homeowners is being diverted to plug state budget gaps. In a budget proposed this week, California joined more than a dozen states that want to help close gaping shortfalls using money paid by the nationas biggest banks and earmarked for foreclosure prevention, investigations of financial fraud and blunting the ill effects of the housing crisis. California was awarded more than $400 million from the banks, and Gov. Jerry Brown has proposed using the bulk of that sum to pay the stateas debts. The money was part of a national settlement valued at $25 billion and negotiated with five big banks over abuses in their mortgage and foreclosure processes…As part of the settlement, the banks agreed to pay the states $2.5 billion, money intended to help homeowners and mitigate the effects of the foreclosure surge.” Shaila Dewan in The New York Times.

House Republicans are planning a vote on a ‘fast track’ proposal for tax reform. “Speaker John Boehner said in a speech Tuesday that House Republicans would try to attach a timeline to fast-track a broad tax overhaul to a vote extending the George W. Bush-era tax rates before the November elections…’Our bill to stop the New Yearas Day tax increase will also establish an expedited process by which Congress would enact real tax reform in 2013,’ Boehner (R-Ohio) said in remarks to a fiscal summit in Washington. ‘This process would look something like how we handle Trade Promotion Authority, where you put in place a timeline for both houses to act.’…GOP aides said that, even though Boehner specifically discussed Trade Promotion Authority on Tuesday, House Republicans are looking at a variety of expedited processes that have been used in the past, and have yet to settle on just one.” Russell Berman and Bernie Becker in The Hill.

@grossdm: Memo to Boehner, the markets, etc.: the House passing legislation won’t be sufficient to avert tax increases. They’ll have to make a deal

The euro zone narrowly missed recession. “The euro-zone economy narrowly escaped recession in the latest quarter thanks to a surprising rebound in Germany, which offset deepening downturns in Spain and Italy. Although the region avoided two straight quarterly drops in gross domestic product, the common benchmark for recession, the figures nonetheless reflect a deepening divide between Germany and the rest of the euro zone that complicates the bloc’s efforts to stem its debt crisis…Euro-zone GDP was unchanged from the previous quarter, said Eurostat, the European Union’s statistics agency. In annualized terms, GDP rose 0.1% from the fourth quarter, according to calculations by J.P. Morgan Chase. Economists had expected an annualized contraction of around 1%. GDP fell at a 1.2% rate in the fourth quarter…European stock markets rose initially on the figures, which eased fears that the debt crisis may trigger an economic free fall.” Brian Blackstone in The Washington Post.

Export-Import Bank reauthorization cleared the Senate by a wide margin. “On a broad bipartisan vote of 78 to 20, the Senate voted Tuesday to extend the life of the U.S. Export-Import Bank and expand its authority to make loans to U.S. exporters. In the ‘Schoolhouse Rock’ version of how Capitol Hill works, this is what Congress does all the time — passes legislation. But it made for big news on this Capitol Hill, where protracted partisan warfare has meant that lately the story has more often been about votes forced by one party or the other to indignantly demonstrate the otheras opposition…Tuesdayas bill was the rarest of breeds: a lasting compromise on an issue of substance. It renewed the charter of what is commonly referred to as the Ex-Im bank for three years and will over that time raise the cap on the total financing the bank can guarantee from $100 billion to $140 billion.” Rosalind Helderman in The Washington Post.

The U.S.-Colombia free trade agreement took effect. “A free-trade agreement between the U.S. and Colombia took effect Tuesday after years of negotiations and despite strong opposition from U.S. labor organizations, which are worried about jobs being sent abroad and union-busting violence in Colombia. The first products shipped tariff-free were crates of Colombian roses and other flowers that landed Tuesday morning at Miami’s airport…President Barack Obama signed the free-trade agreement with Colombia in October, days after Congress gave its final approval following heated debates. The deal was originally negotiated by the Bush administration, but President Obama reworked the deal to satisfy Democrats. The U.S. exported $14 billion of goods to Colombia last year, everything from cars to consumer electronics to food, and exports are expected to rise by more than $1.1 billion as a direct result of the pact, according to the International Trade Commission.” Dan Molinski in The Wall Street Journal.

Adorable children singing interlude: Two girls cover Gotye’s “Somebody That I Used To Know” from the back seat of the car.

Health Care

Catholic bishops are threatening to sue over the birth control mandate. “The Catholic Church’s U.S. hierarchy warned Tuesday that without quick action by Congress, it will sue the Obama administration for mandating that insurance plans provide birth control to women without a co-pay. ‘[F]orcing individual and institutional stakeholders to sponsor and subsidize an otherwise widely available product over their religious and moral objections serves no legitimate, let alone compelling, government interest,’ lawyers for the U.S. Conference of Catholic Bishops wrote in a letter to federal regulators. Several small Catholic universities have already filed suit over the policy…The bishops’ notice came in 20 pages of comments submitted to the Department of Health and Human Services (HHS) on a forthcoming rule to accommodate certain religious organizations, such as Catholic hospitals, that were not exempted from the original mandate.” Elise Viebeck in The Hill.

Obamacare will expand healthcare options for immigrants. “The Obama administrationas drive to cut down on Americaas uninsured is about to get multilingual. Come 2014, when core provisions of the Affordable Care Act kick in, millions of legal immigrants will have new options for gaining health coverage. And like U.S. citizens, most will be subject to the individual mandate, under which they will be required to get coverage to avoid a penalty. The national health law explicitly excludes illegal immigrants — a politically explosive topic — and bans them from the new state insurance exchanges, even if they use their own money. They will make up a big chunk of the remaining uninsured population. But advocates say states have good reasons to reach out and get uninsured legal residents covered — especially as the federal government picks up most of the tab…In 2014…legal immigrants will be able to shop for health coverage through the new state insurance exchanges.” Kyle Cheney in Politico.

Domestic Policy

The backlash against standardized testing is growing. “The increasing role of standardized testing in U.S. classrooms is triggering pockets of rebellion across the country from school officials, teachers and parents who say the system is stifling teaching and learning. In Texas, some 400 local school boards–more than one-third of the state’s total–have adopted a resolution this year asking lawmakers to scale back testing. In Everett, Wash., more than 500 children skipped state exams in protest earlier this month…The efforts are a response to the spread of mandatory testing in the past decade. Proponents say the exams are needed to ensure students are learning and teachers’ effectiveness is measured. Critics say schools are spending disproportionate time and resources on the tests at the expense of more-creative learning. They also contend the results weigh too heavily in decisions on student advancement, teacher pay and the fate of schools judged to have failed.” Stephanie Banchero in The Wall Street Journal.

The NLRB suspended implementation of its union elections rule. “The National Labor Relations Board (NLRB) suspended implementation on Tuesday of a rule that would speed up union elections. On Monday, U.S. District Judge James Boasberg struck down the regulation. In his ruling, the judge said the labor board only had two members vote on the final rule in December 2011 when it needed three members to form a quorum. In the wake of the court decision, the agency is temporarily suspending the rule’s implementation, which went into effect on April 30. Further, Lafe Solomon, the NLRB’s acting general counsel, withdrew guidance he sent to the labor board’s regional offices and told those offices to follow the old union election rule instead. The agency is still considering its response to the court ruling…’We continue to believe that the amendments represent a significant improvement in our process and serve the public interest by eliminating unnecessary litigation,’ said NLRB Chairman Mark Pearce.” Kevin Bogardus in The Hill.

Dog’s-eye view interlude: Life from on top of puppies.

Energy

Energy independence is no pipe dream. “Every president since Richard Nixon has called for the U.S. to wean itself from needing oil from unstable or unsavory countries. The nation’s new-found energy riches are likely to bring that ambition closer to reality in the next two decades, according to many forecasters. It’s no pipe dream. The U.S. is already the world’s fastest-growing oil and natural gas producer. Counting the output from Canada and Mexico, North America is ‘the new Middle East,’ Citigroup analysts declare in a recent report. The U.S. Energy Information Agency says U.S. oil imports will drop 20% by 2025. Oil giant BP projects the U.S. will get 94% of its energy domestically by 2030, up from 77% now, as oil imports fall by half…Most enticing, a team of analysts and economists at Citigroup argues that the U.S., or at least North America, can achieve energy independence by 2020.” Tim Mullaney in USA Today.

@umairh: So consider how our political institutions are paralyzed by a financial crisis. Now think about energy, water, etc crises. Sweet!

Wonkbook is compiled and produced with help from Karl Singer and Michelle Williams.

Itas truly an honor to be with you in the historic Mellon Auditorium. It was here in the spring of 1949 that the United States and our closest allies gathered to sign the North Atlantic Treaty, giving birth to NATO.

On that occasion, President Truman declared that people awith courage and vision can still determine their own destiny. They can choose freedom or slavery.a

In our time, all of these great nations face a grave threat to freedom, one from within, and that is debt. It is shackling our economies and smothering the opportunities that have blessed us with so much.

Once again the world looks to the United States for what it always has: an example. It is the example of a free people whose hard work and sacrifice make up the sum total of thriving towns and a vibrant economy. Itas a humble government that lives within its means and unleashes the potential of first-rate ideas and world-class products. Itas a nation never content with the status quo and always on the make.

I got a glimpse of this example growing up working at my dadas tavern just outside Cincinnati, and then lived a piece of it running my own small business.

Instead of this shining example, what does the world now see?

A president on whose watch the United States lost its gold-plated triple-A rating for the first time in our history;

A Senate, controlled by the presidentas party, that has not passed a budget in more than three years;

And, earlier this month, another unemployment report showing that the worldas greatest economy remains unable to generate enough jobs to spur strong and lasting growth.

If you should know one thing about me, itas that Iam an optimist.

Yes, times are tough, but our future doesnat need to be dark. We donat have to accept a new normal where the workplace looks more like a battlefield and families have to endure flat incomes, weak job prospects, and higher prices in their daily lives.

We have every reason to believe we can come out of this freer and more prosperous than ever. And we will, if we confront our challenges now while we still have the ability to do so.

For the solution to what ails our economy is not government a itas the American people.

The failure of astimulusa a a word people in Washington wonat even use anymore a has sparked a rebellion against overspending, overtaxation, and overregulation.

Americans, who take pride in living on a budget, recognize we canat go on spending money we donat have, and that our economy is stuck in large part because itas stuck with debt.

Nationwide, weare seeing a groundswell of support for bold ideas that reject small politics, cast off big government, and return us to common sense and first principles a the kind of ideas that will restore prosperity and substantially improve the trajectory of our economy.

In March, as part of our Plan for Americaas Job Creators, the House passed an honest budget with real spending cuts, pro-growth tax reform, and serious entitlement reform. Itas a far-reaching effort to control governmentas worst habits and capitalize on the American peopleas best. This budget gets our fiscal house in order AND promotes long-term growth. Far from settling for stability, it offers a true path to prosperity.

Various bipartisan commissions and coalitions have devised ambitious plans as well. The math and the mix are different, but the goals are mainly the same.

And of course, there are summits like these that bring together people who just get it. Of course, while Iam happy to be here and Iam sure we all enjoy each otheras company, we can also agree that weave talked this problem to death.

Itas about time we roll up our sleeves and get to work.

For all the focus on Election Day, another date looms large for every household and every business, and thatas January 1, 2013.

On that day, without action by Congress, a sudden and massive tax increase will be imposed on every American a by an average of $3,000 per household. Rates go up, the child tax credit is cut in half, the AMT patches end, the estate tax returns to 2001 levels, and so on.

Now, it gets a little more complicated than that. What will expire on January 1 is cause for concern a as is what will take effect. That includes:

Indiscriminate spending cuts of $1.2 trillion a half of which would devastate our men and women in uniform and send a signal of weakness;

Several tax increases from the health care law that is making it harder to hire new workers;

As well as a slate of energy and banking rules and regulations that will also increase the strain on the private sector.

But a| it gets even more complicated than that.

Sometime after the election, the federal government will near the statutory debt limit.

This end-of-the-year pileup, commonly called the afiscal cliff,a is a chance for us to bid farewell a permanently a to the era of so-called atimely, temporary, and targeteda short-term government intervention.

For years, Washington has force-fed our economy with a constant diet of meddling, micromanagement, and manipulation. None of it has been a substitute for long-term economic investment, private initiative, and freedom

Previous Congresses have encountered lesser precipices with lower stakes, and made a beeline for the closest lame-duck escape hatch.

Let me put your mind at ease. This Congress will not follow that path, not if I have anything to do with it.

Having run a business, I know that failing to plan is planning to fail. The real pain comes from doing nothing a| aausteritya is what will become necessary if we do nothing now. Weall wake up one day without a choice in the matter.

Thereas also no salvation to be found in doing anything just to get by, just to get through this year.

aNothinga is not an option, and aanythinga is not a plan. To get on the path to prosperity, we have to avoid the fiscal cliff, but we need to start today.

To show my intentions are sincere, Iall start with the stickiest issue, and that of course is the debt limit.

On several occasions in the past, the debt limit has been the catalyst for budget agreements. Last year, however, the president requested a quote-unquote acleana debt limit increase a business as usual.

Well Iave run a business, and thatas no way to do it. Itas certainly no way to run a government either, especially one that has run up a debt bigger than the entire economy. Business as usual will no longer do.

So last year around this time, I accepted an invitation to address the Economic Club of New York. I went up there and said that in my view, the debt limit exists in statute precisely so that government is forced to address its fiscal issues.

Yes, allowing America to default would be irresponsible. But it would be more irresponsible to raise the debt ceiling without taking dramatic steps to reduce spending and reform the budget process.

We shouldnat dread the debt limit. We should welcome it. Itas an action-forcing event in a town that has become infamous for inaction.

That night in New York City, I put forth the principle that we should not raise the debt ceiling without real spending cuts and reforms that exceed the amount of the debt limit increase.

From all the way up in Midtown Manhattan, I could hear a great wailing and gnashing of teeth. Over the next couple of months, I was asked again and again if I would yield on my aposition,a what it would take, if I would budgea|

Each and every time, I said anoa a| because it isnat a apositiona a itas a principle. Not just that a itas the right thing to do.

When the time comes, I will again insist on my simple principle of cuts and reforms greater than the debt limit increase. This is the only avenue I see right now to force the elected leadership of this country to solve our structural fiscal imbalance.

If that means we have to do a series of stop-gap measures, so be it a but thatas not the ideal. Letas start solving the problem. We can make the bold cuts and reforms necessary to meet this principle, and we must.

Just so weare clear, Iam talking about REAL cuts and reforms a not these tricks and gimmicks that have given Washington a pass on grappling with its spending problem.

Last year, in our negotiations with the White House, the president and his team put a number of gimmicks on the table. Plenty of thought and creativity went into them a things like counting money that was never going to be spent as savings.

Maybe in another time, with another Speaker, gimmicks like these would be acceptable.

But, as a matter of simple arithmetic, they wonat work.

They wonat work, and as I told the president, weare not doing things that way anymore.

What also doesnat count as acuts and reformsa are tax increases. Tax hikes destroy jobs a especially an increase on the magnitude set for January 1st. Small businesses need to plan. We shouldnat wait until New Yearas Eve to give American job creators the confidence that they arenat going to get hit with a tax hike on New Yearas Day.

Any sudden tax hike would hurt our economy, so this fall a before the election a the House of Representatives will vote to stop the largest tax increase in American history.

This will give Congress time to work on broad-based tax reform that lowers rates for individuals and businesses while closing deductions, credits, and special carveouts.

Eyebrows go up all over town whenever I talk about this, but when I say abroad-baseda tax reform, I mean it. We need to do it all a| deal with the whole code, personal and corporate itas fairer and more productive for everyone.

Thatas why our bill to stop the New Yearas Day tax increase will also establish an expedited process by which Congress would enact real tax reform in 2013. This process would look something like how we handle Trade Promotion Authority, where you put in place a timeline for both houses to act.

The Ways Means Committee will work out the details, but the bottom line is: if we do this right, we will never again have to deal with the uncertainty of expiring tax rates.

Weall have replaced the broken status quo with a tax code that maintains progressivity, taxes income once, and creates a fairer, simpler code.

And if we do THAT right, we will see increased revenue from more economic growth.

Again, change doesnat need to be sudden or painful.

Last fall, when I addressed the Economic Club of Washington, I said that making relatively small changes now can lead to huge dividends down the road in terms of debt reduction. As we approach the issue of the debt limit again, we need to continue to bear this in mind.

As you know, we could eliminate all of the unfunded liabilities in Social Security, Medicare and Medicaid tomorrow, and the effect within the Congressional Budget Office 10-year window could be minimal.

Thatas because changes to these programs take time and are phased-in slowly.

For example, when Congress last increased the retirement age for Social Security, the increase a a mere two years a was scheduled to fully take effect 40 years after the law was enacted.

Another example: take the House Budget Resolution and its assumptions for Medicare reform. Those would not even begin until after 2022.

Smart and modest changes today mean huge dividends down the line.

Now, I can already hear the grumbles a| partisans getting all worked up or people saying, eh, letas wait until after the election.

We canat wait. Employers large and small are already bracing for the coming tax hikes and regulations, which freeze their plans. The markets arenat going to wait forever; eventually theyare going to start reacting.

We now know that we ignore these warnings at our own peril.

Thatas why the House will do its part to ease the uncertainty surrounding the fiscal cliff. And I hope the president will step up, bring his partyas Senate leaders along, and work with us.

Because if thereas one action-forcing event that trumps all the rest a even the debt limit a itas presidential leadership.

Ladies and gentlemen, I believe President Obama cares about this country and knows what the right thing to do is. But knowing whatas right and doing whatas right are different things.

The difference between knowing whatas right and doing whatas right is courage, and the president, Iam sorry to say, lost his.

He was willing to talk about the tough choices needed to preserve and strengthen our entitlement programs, but he wasnat ready to take action.

As it turned out, he wouldnat agree to even the most basic entitlement reform unless it was accompanied by tax increases on small business job creators.

We were on the verge of an agreement that would have reduced the deficit by trillions, by strengthening entitlement programs and reforming the tax code with permanently lower rates for all, laying the foundation for lasting growth.

But when the president saw his former colleagues in the Senate getting ready to press for tax hikes, he lost his nerve. The political temptation was too great. He moved the goalposts, changed his stance, and demanded tax hikes.

We ended up enacting a package with cuts and reforms larger than the hike. But it could have been so much more.

The letdown was considerable. And, in turn, our nationas credit rating was downgraded for the first time.

Well it should also be the last time that happens, which is why I came here today.

If the president continues to put politics before principle a or party before country, as he often accuses others of doing a our economy will suffer and we may well miss our last chance to solve this crisis on our own terms.

But if we have leaders who will lead a| if we have leaders with the courage to make tough choices and the vision to pursue a future paved with growth, then we can heal our economy and again be the example for all to follow.

Iam ready, and Iave been ready. Iam not angling for higher office. This is the last position in government I will hold. I havenat come this far to walk away.

All my life, Iave operated by a simple code: if you do the right thing for the reasons, good things will happen.

Well, NOW is the time to do the right thing.

Letas do it for the right reasons a we donat need to be dragged kicking and screaming. Thatas not the American way. Letas summon the courage and vision to choose freedom, to choose prosperity, and to determine our destiny.

Then weall not only have succeeded in solving this crisis a weall be worthy of that success.

Thank you all.

Sen. Tom Coburn (R-Okla.) served on the Simpson-Bowles commission, is a member of the Gang of Six, and just published aThe Debt Bomb: A Bold Plan to Stop Washington from Bankrupting America.a We spoke last week in his office. This interview, which focuses on Americaas debt and growth problems, is the first in a two-part series. The second interview, which focuses on health care, will be published later this week.

Ezra Klein: So ataxmageddona is coming at the end of the year. Depending on how you look at it, itas an opportunity for Congress to trigger a massive and unnecessary fiscal crisis, or to actually get some serious legislating done on our long-term fiscal issues. Are you optimistic about the outcome?

Tom Coburn: No. But it depends on what the mix is. If President Obama is still president and weare in control of the Senate, I think youall see significant attempts to get something done. But I donat think theyall be much more successful than what we saw in August. And I wouldnat consider that very successful. If Romney wins and we win control in the Senate, we have to send a signal that weare going to fix it in order to take away all that potential risk to the economy. You have to say weall work all over the Christmas holidays to get it fixed.

EK: When you look at the Romney scenario, it seems Republicans have spent a few years now learning how to take tough votes on the budget, particularly on the Ryan plan. So if Republicans control the House and Senate, it seems to me that youad see quite dramatic action on those issues, as they can be passed with 51 votes through budget reconciliation.

TC: Well, you can. Ryan has a good plan. I donat think it goes fast enough. But the fact is heas got a plan. The president wonat put out a plan. The Senate Democrats wonat put out a plan. Itas kind of like boxing with a shadow. You canat ever hit it. But it doesnat matter if youare Democrat or Republican. The pain will get worse every year we donat fix these things. And there will come a time when it wonat matter if youare a Republican or Democrat. And I donat have much faith right now that weare up to the task of coming to agreement to fix this.

EK: I want to come back to the question of the plans in a second,. But your book opens by imagining a very dire fiscal crisis in 2014. And this goes to your contention that Ryanas plan doesnat bring down the debt fast enough. Where do you get the urgency of your schedule? I look at Treasuries and theyare selling with very low yields. So you can say thatas just the Federal Reserve manipulating prices. So then I look at credit default swaps on the United States, and there are no alarm bells there, either. I look at countries like Japan and England that have carried on with very high debt levels for a very long time. Weave seen other countries that control their own currency manage very high debt levels throughout the 20th Century.

TC: Well, you need to go study Japan. Theyare going to crash.

EK: People have been saying that for 20 years.

TC: You have two things coming together. This is the first year theyall be a net issuer of debt outside their country. Theyave totally financed all their debt internally. We havenat. Thatas one big difference. They also have a much lower birth rate. Seven births for every 1,000 people. So their population is shrinking and their demographic shift is much worse than ours. And this year, the postal system there that runs all their retirement accounts will not be buying any government debt. Zero. So the Japanese government, for the first time, is going into the international market. And the yenas value is going to decline against every major currency. Whether that happens this year or next year or in three years, itas going to happen. And theyave now had almost two decades of no real GDP growth. So Japan isnat going to make it. The reason they havenat had any problems is they havenat asked anyone else in the world to buy their debt. Now theyare going to have to.

The same thing ultimately will happen to us, but weall be the last person it happens to. The world still views this as the safest place. You see Greece, which will probably be out of the euro by the end of this year. Then you look at Spain and Italy and Portugal and Ireland. Europe is going to print money just like Ben Bernanke is printing money. And whatas the end result of that? Inflation.

EK Well, it depends how you manage it.

TC: How do you sterilize $3 trillion worth of debt?

EK: The difficulty for me when you say that is Iam a market-oriented guy. I trust the markets, more or less. And if you look at the marketas inflation expectations, theyare not high. They donat think what the Fed has done will lead to inflation.

TC: They donat now. But nobody ever does when you print money like that. If you study [Carmen] Reinhart and [Kenneth] Rogoff and what they said, they know whatas coming. Every country thatas ever been with a debt crisis and has printed money has ended up with an intentional inflation problem. Think for a minute that youare Ben Bernanke. Youare trying to control inflation, jumpstart the economy, and improve the unemployment rate. What do you think his long-term answer for this is?

EK: At the moment, I donat think he has one.

TC: His long-term answer is inflation.

EK: Not only do I think that would be an okay answer, but Reinhart and Rogoff do, too. Rogoff has been arguing for higher inflation for a long time. But Bernanke says he wonat permit that. And I donat see a reason he would allow inflation later but oppose it now, when it could really help. In fact, what heas been saying is he wonat do the monetary stimulus many want now specifically because he doesnat want to deanchor inflation expectations later.

TC: But 10 years from now, our bonds wonat be two percent. So what percentage of the total budget do interest costs become if you normalize back to the historical average? If you do that today, you add $650 billion to our annual interest costs. How long do you think he can keep two percent inflation? If he does, then weall continue to have two percent growth. In other words, if we start getting the growth, then weall see the inflation. The reason thereas no inflation now is thereas no velocity to the money. Weave got $2 trillion sitting on the sidelines with corporations in this country. Another few trillion in personal bank accounts. And the reason is no one has confidence in the future. And itas not so much the details of the plan to fix it as the psychological confidence it will get fixed. And thatas why I voted for Bowles-Simpson.

EK: When Bowles-Simpson went before the House, it was rejected by a huge bipartisan majority. Do you see there as being any possibility that one outcome of the taxmageddon period could, be a grand bargain in the Gang of Six/Simpson-Bowles vein?

TC: I donat know the answer to that, frankly. My hope would be we reach a grand compromise. But the vote in the House proves what I said in the book. You had a vote in the House on a plan that could solve our problems and the Democrats didnat vote for it because it touches Social Security and Republicans vote against it because of revenues. Both sides accentuated their differences rather than sending a signal to the international community that we could get together and cut $4.5 trillion over the next 10 years. Which raises the question: Why are they here? If youare here just to get reelected, youare worthless to the country.

EK: Youare searingly critical of Congress in the book. So let me ask you: How do you fix the Senate?

TC: Let the Senate operate the way itas supposed to. put stuff through committees. bring it up in regular order. Have an open amendment process. Iam the number one amendment offerer in the Senate in the last few years.

EK: Congratulations.

TC: Well, itas not necessarily a compliment. But the point is the Senate really could work if you let it work on the real issues. If you were to put Simpson-Bowles on the floor and really have a strong debate on that bill, it could get through the Senate.

EK: When I talk to the party tactician types, the senators trying to figure this out, their argument is that when you try to do this out in public, with 24-hour news media broadcasting every move and every possible compromise, the issue polarizes, the interest groups descend, the party bases descend, and solutions get taken off the table. In the end, they think there will have to be some big backroom deal. They think a more open process would make this harder, not easier.

TC: I just adamantly disagree. Thatas the sickness of Washington. What that really says is the politician doesnat want to stand up and debate and tell their interest groups no. We had the pharmacists in here earlier. They want a bill to protect community pharmacies. And I said, you know what, the market is changing, Iam not about to support a bill, even though you support me, that doesnat allow the market to work this thing out. I think the reason you get this kind of analysis is because people wonat stand up and do what they think is right because it hurts their political chances. And on our bonds, our bonds will be fine until theyare not, till that tipping point comes when they say crap, we canat get out of it.

EK: As you just said, youare a market guy. You want the market to work things out. You believe in the marketas ability to work things out. So why do you think your view of our likely debt and inflation path is so much more dire than the marketas?

TC: Because the market is biased towards up. Why do you invest in the market? Not because you think youall lose money. Why do you invest in bonds? To make money. Where is the contrarian view?

Let me give you one example. Five weeks ago, Bernanke said there would be no QE3. What happened to the 10-year bond in four days? It rose 48 basis points. What the market said then is if thereas no more QE3, weare going to short the value of a bond. Thatas one little signal. What if you get 20 signals? How do you explain the Chinese getting rid $160 billion of our debt last year? Eventually, theyare not going to buy our debt. Who bought most of our debt last year? It was the Federal Reserve. Go out there and try and float $10 billion of our long-term debt. You canat. Thereas no market. Because the long-term market is saying, send us a signal that youall fix this. And so the reason we have the shortest debt maturity in our countryas history is first, because you canat sell long-term debt because no one wants to buy it, and second, because long-term debt makes the deficit look worse.

Look, I may not be right. But what I see and the people I read — all I do at night is read economic reports on peopleas view of us — and when you look at it, Spain, wonat make it, the European Central Bank will eventually print money. You agree?

EK: Iam hoping so.

TC: Theyall do that to buy time. And where I agree with Paul Krugman is you canat just have austerity. You need growth, The question is how do you get the growth. Do you get the government-driven growth, or do you get confidence and certainty so that the private money comes in and creates the growth? One costs you double. The other costs you half. So thereas a fourfold difference in where you get the growth from. When you borrow the money to spend $800 billion, you got that debt hanging on you, which Reinhart and Rogoff have proven without a doubt, when youare at 90 percent and above, and weare at 101 percent right now, debt-to-GDP, thatas at least a one percent cut to growth.

EK: To go back to Krugman, if he were sitting here, head say in this crisis thereas been no evidence anywhere that cutting deficits leads to growth. Weave not seen it in the euro zone or the UK. And head say the Reinhart/Rogoff story is a correlation story. It doesnat prove that high debt always and everywhere hurts growth.

TC: Go look at Sweden. Hereas what Sweden did. They cut their spending and their taxes. They have the best growth rate in Europe. They had a surplus this year. They had growth at six-plus percent. They actually did a Reagan style approach to their problem by cutting spending and cutting taxes. And theyare the fastest growing with a decline in their debt-to-GDP ratio.

EK: But correct me if Iam wrong, but if I recall, Swedenas monetary policy went towards a very sharp devaluation, theyave been driven by export growth, and alongside Israel, theyave been more aggressive than any other central bank in the world. Theyave done stuff that if we did it here, people would lose their minds.

TC: I think there are monetary parts to that. But their finance minister put in place tough stuff. They had people who left Sweden because of the tax ratio. Now theyave moved back. And itas not a perfect example, but itas an exception to the Krugman story.

EK: Is there anything we need but deficit reduction to get growth back on the right path?

TC: Itas signals. The number one thing, and I think most economists would agree, confidence matters. If you have negative confidence, then you get much lower growth. If you have positive confidence you get much better growth with the same set of numbers. I think people are so disgusted with Washington that if we send a signal weare actually going to fix this — with any combination of tax and spending, remember that I voted for Simpson-Bowles — weall get our mojo back when people have some confidence in the future and see their Congress solving their problems.

EK: It seems your view is that just as the market needs to have faith in your demographics and in the flexibility of your labor market and the competitiveness, it has to have faith in your political systemas capacity to deal with long and short-term threats. Do you see any reason for the market to have that faith right now?

TC: No. One of my biggest worries is what happens if Romney wins and Republicans control both chambers, do they have the courage to do what it takes to fix the country? Itas kind of their last chance. If theyare given the favor of control and they donat act on it, why should you ever trust them again? You shouldnat. Itall be the death knell of the Republican Party. They controlled it all for four years under Bush and grew the government. They created a new entitlement with no revenue. Went against the very tenets of what they said they believe.

One of the reasons I wrote the book was to show a whole lot of people how many stupid things we do. I donat really blame presidents too much. You gotta get appropriations. I say the problem is not that we donat get along. We get along too well. Government is twice the size it was 10 years ago. The president canat spend the money if we donat appropriate it. So itas not a president problem. Itas a congressional problem.

EK: On the other side of that hypothetical, letas say Obama wins, but Republicans hold the House and maybe even take the Senate. How do they act in that hypothetical? Are they more or less willing to compromise with Obama?

TC: I donat know. Iam not good at predicting that. If President Obama is president again, those problems are still there and we have to solve them. He knows that. Weave had conversations where heas told me heall go much further than anyone believes heall go to solve the entitlement problem if he can get the compromise. And I believe him. I believe he would.

Californiaas fiscal crisis will look sadly familiar to close watchers of the national checkbook. Thatas because California is not having a fiscal crisis so much as a political crisis. The trigger may have been the recession, but the root cause was written into the state Constitution, and it was visible long before the housing boom went bust.

In California, passing a budget or raising taxes requires a two-thirds majority in both the stateas Assembly and its Senate. That need not pose a problem, at least in theory. The state has labored under that restriction for a long time, and handled it with fair grace. But as the historian Louis Warren argues, the vicious political polarization thatas emerged in modern times has made compromise more difficult.

All of this, however, has been visible for a long time. Polarization isnat a new story, nor were Californiaas budget problems and constitutional handicap. Yet the state let its political dysfunctions go unaddressed. Most assumed that the legislatureas bickering would be cast aside in the face of an emergency. But the intransigence of Californiaas legislators has not softened despite the spiraling unemployment, massive deficits and absence of buoyant growth on the horizon. Quite the opposite, in fact. The minority party spied opportunity in fiscal collapse. If the majority failed to govern the state, then the voters would turn on them, or so the theory went.

That raises a troubling question: What happens when one of the two major parties does not see a political upside in solving problems and has the power to keep those problems from being solved?

If all this is sounding familiar, thatas because it is. Congress doesnat need a two-thirds majority to get anything done. It needs a three-fifths majority, but thatas not usually available, either. Ever since Newt Gingrich partnered with Bob Dole to retake the Congress atop a successful strategy of relentless and effective obstructionism, Congress has been virtually incapable of doing anything difficult because the minority party will either block it or run against it, or both. And make no mistake: Congress will need to do hard things, and soon. In the short term, unemployment is likely to remain high and the economy is likely to remain weak unless Congress can muster another round of serious stimulus spending. The economist Karl Case, co-founder of the famed Case-Shiller housing index, now believes that earlier optimism about our economic recovery a which he shared a was misplaced. aThe probability is very high of a serious double dip like 1982,a he told the New York Times. The housing market seems to be sagging again, and the governmentas interventions a not just the stimulus but also relaxed standards at Fannie Mae, Freddie Mac and the Federal Housing Authority a are set to end.

Further out, the long-term deficit problem, which is driven largely by health-care costs, is startling. The Center for Budget and Policy Priorities estimates that debt will reach 300 percent of gross domestic product come 2050 a and that estimate might be optimistic. But solutions seem unlikely. No one who watched the health-care bill wind its way through the legislative process believes Congress is ready for the much harder and more controversial cost-cutting that will be necessary in the future.

Similarly, Sens. Kent Conrad and Judd Gregg recently suggested a bipartisan deficit commission that would reach a consensus on the budget and report back to a grateful Congress. On Tuesday, a Wall Street Journal editorial showed the conservative interest in such compromises: Republicans should aagree to a deficit commission only if it takes tax increases off the table,a it said, reminding wavering Republicans that aPresident George H.W. Bush renounced his no-new-taxes pledge and made himself a one-termer.a

These two problems get to the essential difficulties confronting the nation: There is no doubt that minority parties generally profit in elections when the unemployment rate is high. But given that reality, what incentive do they have to help the majority party lower the unemployment rate? Further out, there is no doubt that the majority party has an incentive to prevent a fiscal crisis on its watch. But what incentive does the minority party have to sign on to the screamingly painful decisions that will avert crisis?

In another system of government, that wouldnat much matter. In our system of government, which requires a supermajority in the Senate for most projects, it matters a lot. On Jan. 20, for instance, the Senate is expected to vote on raising the debt ceiling. Generally, this is a bipartisan vote, as the debt is a bipartisan creation. This year, Senate Minority Leader Mitch McConnell reportedly told Majority Leader Harry Reid that if he wants an increase in the ceiling, he owns it and needs to find the votes for it. Thatas the sort of budgetary brinksmanship that brings us back to California.

The lesson of California is that a political system too dysfunctional to avert crisis is also too dysfunctional to respond to it. The difficulty is not economic so much as it is political; solving our fiscal problem is a mixture of easy arithmetic and hard choices, but until we solve our political problem, both are out of reach. And we canat assume that an emergency, or the prospect of one, will solve the political problem for us. If you want to see how that movie ends, just look west, as we have so many times before.