Ezra Klein

President Obama vetoed H.R. 3808, the Interstate Recognition of Notarizations Act of 2010, yesterday. The law, which would've allowed banks to speed the notarization process by using out-of-state, electronic firms, passed the House and Senate with virtually no notice, but became unexpectedly consequential as accusations of fraudulent contracts ripped through the mortgage industry. Some thought the bill might help with the current problems, unfreezing some of the contracts and demonstrating the government's intention to push through this. But no, we're stuck in this morass for at least awhile longer. Sorry, recovery.

It's still a bit early to say how much damage the new foreclosure crisis will do to the markets. But even if this one doesn't turn out so bad, the fact that it could've been bad is, well, bad enough. The repeated reminders of this sort of unexpected risk are preventing businesses from investing enough to nurture a serious recovery.

In 2007 and 2008 we had a major financial crisis. That led to a wrenching recession. But what killed the recovery was the European debt crisis. It was proof that there wasn't just one risk that the system hadn't properly accounted for, but many risks. And in a fragile global economy, the impact of any negative event was going to be magnified.

And now there's another major risk that investors weren't expecting We had too much boom because people underpriced risk. They couldn't seem to see it anywhere. We're having too much bust because people are overpricing it. Suddenly, they're seeing it everywhere. We're not going to climb back to normal until businesses feel confident that the economy won't detonate six months from tomorrow, drying up credit and rendering all their new hires and investments terrible economic decisions. But for that to happen, the economy needs to stop offering plausible crises every six months. And on that, it's not cooperating.

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Obama is declining to sign legislation that would expedite foreclosure processes, reports Jia Lynn Yang and Ariana Eunjung Cha: "The vetoed legislation, which is two pages long, would have required local courts to accept notarizations, including those made electronically, from across state lines. Its sponsors said it was intended to promote interstate commerce. Lawmakers saw no problems when the House approved it in April by a voice vote, which leaves no record of votes. The Senate passed the bill unanimously last week. But as the lack of a proper paper trail in mortgage documents came to light, the idea of relying on electronic notaries triggered protests from real estate lawyers and consumer advocates. Relying more on electronic notaries, they warned, could allow more fraud into the system."

A district court judge has ruled the individual mandate is constitutional, reports N.C. Aizenman: "Other federal courts have already dismissed some challenges to the law on technical grounds - ruling, for instance, that the plaintiffs lacked standing. However, the decision issued Thursday by Judge George Caram Steeh of the Eastern District of Michigan is the first to reject a claim based on the merits, marking a notable victory for the Obama administration...Steeh found that 'far from 'inactivity,' by choosing to forgo insurance, plaintiffs are making an economic decision to try to pay for health-care services later, out of pocket, rather than now through the purchase of insurance, collectively shifting billions of dollars...onto other market participants.'"

IMF chief Dominique Strauss-Kahn has condemned China's currency policy, reports Howard Schneider: "'We have been one of the institutions to repeatedly say that we believe the renminbi was substantially undervalued and that something had to be done to fix this problem,' IMF managing director Dominique Strauss-Kahn said in a news conference opening the agency's annual meeting. 'Many do consider their currency as a weapon, and this is not for the good of the world economy.'... World Bank President Robert Zoellick noted that a wave of trade protectionism sparked the Great Depression in the 1930s and cautioned that policymakers needed to calm the current dispute before it gets out of hand."

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

'70s funk interlude: Sly & the Family Stone's "Luv 'n Haight".

Still to come: New Fed bond purchases may not do much; BP's oil spill review may have had an ulterior motive; there are costs to the Obama administration's immigration enforcement strategy; and Johnny Depp visits an elementary school.

Recap: This is no way to staff a government; the health-care system's status quo problem; and Rep. Brad Miller on the foreclosure crisis.

Elsewhere:

1) Who can call themselves a feminist?

2) David Plouffe spins the election hard.

3) More than 1,000 companies are taking advantage of this program in health-care reform, but that's not front-page news.

4) A new study argues that the U.S. health-care system is partly behind our mortality gap.

5) Zillow maps the change in housing prices in each congressional district.

I'd previously scheduled an interview with Rep. Brad Miller (D-N.C.) to talk about the financial regulation bill. But Miller is known as one of the House's leading experts on the mortgage market, so given the news of the day, our interview quickly focused on the crisis in foreclosures -- its effect on the economy and, in particular, on the big banks. We might be in a situation, Miller says, where the banks need another bailout, but there's no way they can get one. And what then?

An edited transcript of the interview follows.

Ezra Klein: What’s happened to the mortgage market? It’s odd to say that the new foreclosure crisis is that the foreclosures have had to stop, but that’s the new reality, right?

Brad Miller: There is massive potential liability for the securitizers, which are mostly the biggest banks. The contract was that if mortgages didn’t meet certain requirements, then the securitizer would buy them back. The mortgage servicers and trustees have exclusive control over the paperwork. Both the investors, the people who own the mortgage-backed securities, and the homeowners, really depend on them. There’s been lots of litigation where investors try to get securitizers to buy back the bad mortgages because they were flawed, but that litigation has been stymied by procedural objections. If the private investors can break through that defense and require the mortgages that don’t meet the requirements to be bought back, the liabilities for the biggest banks will be enormous.

EK: So this is, in other words, a problem for bank balance sheets. These banks bought the mortgages from individuals, packaged them into securities, and then sold them to investors. But because the mortgage contracts weren’t valid, the investor can potentially force the banks to take the mortgages back, thus blowing a new hole in their balance sheets?

BM: Right. They’ll have to buy them one mortgage at a time. Someone said there might be a second round of bank insolvencies because of this and there might need to be more TARP. There is no chance that Congress would pass more TARP.

EK: What does this mean for the economy? When people first hear about it, it almost sounds good. No more foreclosures? Great! Let the banks suffer for a while.

I've not been covering the foreclosure mess that quickly because, well, I'm totally confused by it. Is this an unexpected gift that will slow foreclosures and give distressed homeowners more leverage to negotiate principal write-downs in court? Is this a nightmare that will throw the housing market into chaos, freaking out other markets and slowing the necessary clearing? Both?

I'm still trying to figure it out. And it looks like I'll have more time to do so. The White House has announced that President Obama will "pocket veto" H.R. 3808, the Interstate Recognition of Notarizations Act of 2010, which would've allowed banks to shortcut the current notarization process by forum shopping to states that are willing to sign off on anything. That might have fixed much of this foreclosure mess, but it would've fixed it by bailing banks out of a situation they created -- not the sort of thing the White House wants to do just weeks before the midterm.

If you, like me, are still trying to figure this out, head over to The Washington Post's page collecting all of our coverage on the issue.

That's from Igor Volsky and the Center for American Progress team. Conservatives will look at that graph and say, sure, it might be nice, but those cuts will never be implemented, and if they are implemented, they'll never work, and in any case, we're going to repeal them.

It is of course true that for cuts to work, they have to be implemented, and not repealed. And it is also true that Republicans want to repeal not just the Affordable Care Act, but the Medicare cost controls in particular. And at this point, the Republican Party has not agreed on any package of reforms that would slow Medicare spending by an equivalent amount, and that they would be willing to implement. If you're a deficit hawk, in other words, at the moment, the Affordable Care Act is your best, and really only, hope.

The only reason Wall Street exists today is because Barack Obama linked arms with George W. Bush to help pass TARP. The only reason the Republicans are likely to take the House next month is because they have successfully pinned TARP on the Democrats and have sworn -- including on Page 2 of their pledge -- to never allow another bailout. Yet Wall Street money is rushing toward the GOP. Rushing, in other words, to the very people who've pledged not to save them again if anything should go wrong. Max Abelson reports on the thinking:

"What people care about is they want a more pro-business regime -- that's it," one of the city's most important hedge fund managers said in a very brief interview.

But between dread about sovereign debt, the housing market, unemployment, third-quarter losses and deflation -- if not inflation, too -- it does not seem impossible that another financial crisis could somehow happen again. And if Wall Street gets its way, it will have nudged into power a party that has deafeningly proclaimed the evils of government intervention.

Does Wall Street's support of a party that's openly pledged not to save them mean it has accepted it shouldn't be bailed out again? Interviews with executives suggested not, for three reasons. They think that another crisis won't happen, or that if it does, they will not need another bailout because of reforms, or that if they do, our country's leaders would oblige, no matter who's in power.

The good news from the 2000s -- in graphs.

You stay classy, South Carolina:

South Carolina’s more than 236,000 unemployed workers could have to take a drug test in order to receive jobless benefits, according to a proposal by Republican gubernatorial candidate Nikki Haley on Tuesday. [...] Haley said testing the unemployed was one of several steps in ensuring the newly restructured Department of Employment and Workforce — now a cabinet agency — pays benefits only to those who have earned them. “We will make sure, above all, that there will be no … benefits if they do not pass a drug test,” Haley said.

This isn't an original idea, as it happens. Sen. Orrin Hatch proposed the same thing earlier this summer. Note that both Nikki Haley and Orrin Hatch would describe themselves as small-government conservatives. "Government is never the answer," Haley likes to say. "Government usually messes up more than it fixes."

In this case, government wouldn't even be trying to fix anything. There's no known epidemic of cocaine use among the unemployed. And even if there were, the point of unemployment insurance isn't to reward people for good behavior. As Annie Lowrey* notes, it's insurance. Our employers pay into it, and none of us agreed to drug tests as part of the contract. Moreover, it's not just the workers themselves who depend on it, but their spouses, and their children, and their communities. You may not like pot, but is there a reason kids should suffer because their depressed father smoked a joint?

Tyler Cowen rereads Friedrich Hayek's "The Road to Serfdom." The most important phrase in the book, he says, is "this book, written in my spare time from 1940 to 1943." "In those years, how many decent democracies were in the world?" asks Cowen. "How clear was it that the Western powers, even if they won the war, would dismantle wartime economic planning? How many other peoples' predictions from those years have panned out? At that time, Hayek's worries were perfectly justified."

All that's perfectly correct. And yet, I see "The Road to Serfdom" when I go to the offices of Republican members of Congress. This isn't Hayek's fault, of course. But political movements have a difficult time adapting to victory. Last night, I listened to the candidates for Delaware's congressional seat debate each other. The Republican, a rather extreme individual named Glen Urquhart, explained that our way out of the recession was to help the private sector get back on its feet. The Democrat, John Carney, agreed.

Yesterday morning, I went to the Eisenhower Executive Office Building to talk with Austan Goolsbee, head of President Obama's Council of Economic Advisers. "The business cycle in the 2000s was driven by consumer spending faster than income growth and residential housing investment, and that was unsustainable," he told me. "And so we’re trying to point to an older-style of recovery that’s business-investment driven."

There isn't any serious player in American politics who supports a centrally planned economy. There are people who support social insurance, and people who support national defense, but no one wants Apple or General Mills to take production orders from a bureaucrat. But it's very hard for political movements to adjust to a world in which they only have to be 10 percent as worried. In some ways, there seems to be an opposite incentive, as lower stakes require groups to use more extreme rhetoric if they're to keep their followers engaged. If Obama had really pushed for a socialized health-care system, the right could've argued against that. As it was, his plan was quite moderate, and so death panels entered the discussion.

At this point, the liberals I know are excited by the prospect of a few things. Extending health insurance -- probably private -- to all Americans. Reducing health-care costs for all Americans, as that will leave them with more of their income to spend on what they wish. Doing something about carbon emissions, preferably through market signals like a carbon tax or cap-and-trade. And, in my case, some sort of early-childhood education system. Marx would be very disappointed, but Hayek, I think, would be quite comforted.

What does this look like to you? A cake, right?

This, my friends, is the turducken of cakes. "The Pumpple cake. Apple and pumpkin pies are baked inside layers of chocolate and vanilla cake! Vanilla buttercream holds the whole thing together." Here's another shot:

This was brought to my attention, I'll note, by a sober-minded, well-respected economist at a Washington think tank.

Here's the play: Someone somewhere reports that the Affordable Care Act will require some change in the status quo. Maybe it's that insurers can no longer discriminate against sick children, and so some of them are pulling products that were only financially viable so long as they could discriminate against sick children. Maybe it's that McDonald's won't be able to offer miniature health-care "coverage" that caps annual benefits at $2,000, a form of insurance that wouldn't protect anyone from a real illness and that Republican Sen. Chuck Grassley once described as "not better than nothing." Maybe it's that 3M is changing its early-retiree health-care plans, for reasons that may or may not be related to the new health-care law. Opponents of the reforms jump on the story. "See!" they say. "This is a catastrophe!" Supporters -- at least some of them -- e-mail me. "This needs a rebuttal, thanks."

But it doesn't need a rebuttal. It needs explanation, and that's what's usually lacking. And when they do explain the particular rule or regulation causing the disruption, the situation often looks very different. The McDonald's plans, for instance, shouldn't continue after 2014, though it looks like the administration is going to give them a waiver to escape the bad press. The point of health-care reform was to get people into real insurance and protect them from illusory plans that run out when they get sick. The 3M situation is too opaque to say anything about. And though I'm actually sympathetic to the argument that there shouldn't be rules limiting insurers from discriminating against applicants until there's an individual mandate and subsidies that can support a universal market, I doubt that there's much support for the "sure, continue turning away sick children" position.

The administration promised that if you liked your health care, you could keep it. In the overwhelming majority of cases -- far more than 95 percent -- that's true. But there are companies and insurers offering spartan products that don't meet the new -- and frankly, quite minimal -- standards. In some cases, they'll improve their products. In some cases, they'll stop offering the product. And in some cases -- and it's important to watch this, too -- they'll continue the pre-health-care reform trend of dropping coverage for employees, but they'll blame the new law, as it's better to have your employees mad at the government than at you. The end result will be a vastly better health-care system, where 32 million more people have coverage and where tens of millions of more are in far better plans than they would've had without the law. But that will require changes in some of the worst plans, and on the part of some of the worst employers and insurers.

"With each new disruption come loud claims -- some from insurance executives -- that the health overhaul is damaging American health care," writes David Leonhardt, who's been looking at the same stories. "On the surface, these claims can sound credible. But when you dig a little deeper, you often discover the same lesson that the McDonald’s case provides: the real problem was the status quo."

From Steve Rattner's "Overhaul":

Being vetted can be a full-time job. At Josh's suggestion, I had begun talking to my attorneys in mid-December, in part to ascertain whether public office was feasible for me. Every senior appointee has to complete two massive documents, the SF-86, an impossibly tedious security-clearance statement that requires listing -- just for an example -- every foreign trip an applicant has taken in the last seven years, and the SF-278, which involves the disclosure of every financial interest and obligation. Like most recent administrations, this one had added its own questions, derived from past debacles like Zoe Baird's failure to become Bill Clinton's attorney general after neglecting to pay the so-called nanny tax. I can't count the hours I spent complying, but I do know that the honor of working for the federal government cost me more than $400,000 in legal fees.

The vetting rules were more than a personal nuisance; they hampered our ability to assemble a first-class team. As part of his pledge to rid government of special interests, Obama layered new conflict-of-interest strictures on top of the statutory rules that applied mostly to financial holdings. He targeted lobbyists with rules that barred any candidate who had worked for an organization that would be a party to the matter that the individual would be handling in government. This seemingly logical concept had the unintended consequence of severely restricting our ability to hire anyone who knew anything about the automobile industry, a limitation that fueled the very criticism we were trying to counter,

Across the country, we're watching shoddy work on behalf of the banks and mortgage companies do what the government simply couldn't, or wouldn't: Stop the foreclosure crisis in its tracks. The only question is, to what end?

You could see this playing out a number of ways. One is that it gives distressed homeowners breathing room, and more leverage in court to negotiate with their banks. Another is that it collapses the housing market, as no one knows quite what to expect, and no one is quite sure how much inventory is left to trickle out once these lawsuits settle. And then there are the families that are fighting for a reprieve when they'd be better off letting the house go and moving to a community with more jobs. Or maybe people find a way around the problem. Not to sound like a fortune cookie here, but the only certainty is more uncertainty.

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Judges across the country are ruling foreclosures illegal because of faulty paperwork, report Brady Dennis and Ariana Eunjung Cha: "If millions of foreclosures past and present were invalidated because of the way the hurried securitization process muddied the chain of ownership, banks could face lawsuits from homeowners and from investors who bought stakes in the mortgage securities - an expensive and potentially crippling proposition. For the fragile housing market, already clogged with foreclosure cases, it could mean gridlock and confusion for years. And there is concern in Washington that if the real estate market and financial institutions suffer harm, it could force the government to step in again."

Tim Geithner urged the IMF to push China on its currency, reports Howard Schneider: "In seeking to muster a broader coalition, Geithner issued an ultimatum to the International Monetary Fund: take a more aggressive stand on China's currency or potentially lose U.S. backing for a series of efforts pending at the agency. The IMF is debating changes in how it is governed to give greater influence to developing nations in Asia and elsewhere, but Geithner said these steps should be tied to these countries, in particular China, allowing their currencies to more closely adhere to free-market levels."

China will soon lead the world in patent filings, reports David Barboza: http://nyti.ms/cFZVbh

Only nine percent of American companies report any product innovation between 2006 and 2008, says a new National Science Foundation study: http://bit.ly/9Kxx61

The Fed may target an interest rate rather than buy a set amount of bonds, reports Neil Irwin: "Instead of just announcing that it will create, say, $500 billion out of thin air and buy bonds with the money, the Fed could instead announce it will target a certain interest rate and then buy Treasury bonds so that rates in the marketplace reach that level. For example, the Fed could announce that it aims for three-year Treasury debt that now carries an interest rate of 0.56 percent to instead be 0.25 percent. It would then buy Treasury notes in whatever amounts were needed to get rates to the target level. That would help the economy by lowering rates for a broad range of borrowers, including Americans looking to take out a mortgage and companies looking to use debt to finance expansion."

Monetary policy would be a lot likelier to work if combined with fiscal policy, writes Paul Krugman: http://nyti.ms/d1WVKj

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Austan Goolsbee says we'll need to grow, not tax or cut, our way to fiscal sustainability: "What little countries did to deal with their imbalances are frequently not available for giant economies like the U.S. or Japan. More intense research shows that the primary way countries get out of fiscal holes is by increasing their growth rate. To posit that you have to either substantially cut spending or raise taxes belies the fact that what really matters is debt-to-GDP. In the U.S., we’ve often reduced that ratio without running surpluses by getting the growth rate up."

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

Loch rock interlude: Belle & Sebastian play "Piazza, New York Catcher" on Late Night with Jimmy Fallon.

Still to come: US companies are buying back stock rather than creating jobs; the oil spill panel is blasting the Obama administration's response to the catastrophe; deportations are reaching record highs; and the most laser-filled wedding video you've ever seen.

Ran out of time for reconciliation, but if you really want to hear more from me, I'll be talking Congress with Keith Olbermann at about 8:10 eastern.

Austan Goolsbee was the Robert P. Gwinn Professor of Economics at the University of Chicago Booth School of Business and is currently serving as staff director and chief economist on the President's Economic Recovery Advisory Board and as the chair of the Council of Economic Advisers. We spoke this morning about the Bush tax cuts, using a payroll-tax holiday for stimulus, how to spend $700 billion and what to look for in 2011. A lightly edited transcript follows.

Ezra Klein: You guys attack the Republicans for pushing unaffordable tax cuts, but even your plan would add $3 trillion to the deficit over the next 10 years. How can we afford that?

Austan Goolsbee: Look at the decade the middle class has had, where middle-class incomes fell by $2,000 during an economic boom -- a first in our history. That was followed by the worst recession since 1929.I don’t think, in that environment, you can afford to balance the budget on the back of the middle class. You have to address the long-term fiscal challenges facing the country through the bipartisan commission in some bipartisan way.

EK: But indefinitely? Why not do two or three or four years? That way, when it’s time to let them go, you can do so with a veto, rather than requiring 60 votes in the Senate.

AG: I’m not an expert political strategist. I’m just a policy guy. I think the long-term squeeze on the middle class is the most pressing problem facing the sustained growth of the country. But the main way we’re going to balance the budget is ask the middle class to pay for it? You can’t look at the economic performance of the middle class over the last 10 years and think that’ll work.

EK: But on the point of middle-class incomes, the Congressional Budget Office looked at the question and concluded that extending the tax cuts indefinitely would lower incomes by 2020. In other words, it would actually hurt the economy.

AG: As you know, behind any statement like that is some model. In their model, they’ve made an assumption of what deficits do to the interest rate, and my understanding is they’re assuming a relatively significant impact. We’ve had a major deepening of the world capital market in recent years, and so the impacts of tax cuts on the interest rate may not be as big as they’re assuming. If you take a step back, the underlying fiscal crisis facing the country is driven by health-care inflation and entitlement spending. And so we need some outcome from the fiscal commission. But the center of that effort can’t be balancing the budget on the back of the middle class.

EK: The CBO also said that extending all of the tax cuts, including those for income over $250,000, would do less damage to the economy than just extending the middle-class tax cuts. Obviously you disagree, but why?

AG: Having been a major player in, and studied the academic evidence on, how people respond to changes in tax rates, I don’t think the old-style argument that high-income people have big responses to small changes in tax rates is warranted by the evidence. Even a casual look at our experience in the '90s and the 2000s suggests that high-income marginal tax rates aren’t the primary drivers of growth. Bill Clinton raised rates on exactly this group that we’re talking about, and it did not have a significant negative impact on the growth of the country. Then, in the 2000s, we cut high-income tax rates by as much as they’ve ever been cut, and we certainly did not experience a massive renaissance in economic growth. There should be a higher burden of proof on people saying that rates going up by four points on income above $250,000 will have a huge negative effect.

EK: When we talk about the tax cuts, there tend to be a few arguments that get rolled together. One is that it’s good for the middle-class to have some tax relief. Another is that the cuts encourage economic growth, which was the original argument from the Bush team. And then there’s the question of short-term stimulus. Are they good stimulus?

I could do without the pulsating techno, but Del Post's stop-motion video of the process behind this dish is pretty neat:

Via Eater.

Joshua Freed, director of Third Way's clean-energy program, e-mails to say that however bad innovation may be in the private sector as a whole, it's even worse in the energy sector:

In the U.S., the private sector barely invests in any energy research. Where U.S. industries, as a whole, spend an average of 2.6%of their revenue on R&D;, the energy industry invests a paltry 0.23% of revenue on any kind of research -- clean or conventional. This includes funding for expensive research into conventional fuels, such as ultra-deep water drilling and new oil refining techniques.

This stands in stark contrast with the hyper-competitive pharmaceutical industry, where new drugs supplant old ones every year. Pharmaceutical companies spend 19% of revenues, or about $39 billion each year on R&D.; Even the American automakers still invest $17.5 billion in R&D.;

The American Energy Innovation Council has a graph showing the same thing:

The South Fulton Fire Department was right to let the Cranicks' house burn. You can't sell fire insurance but let people pay after the flames have begun. If you do, people will sign up after their houses catch on fire, rather than before. That's a bad business.

Which is why we don't generally run firefighting as an insurance business (this, actually, was a weird case where a city's fire service sold protection in a rural area outside the city's limits). We run it as a collective good. People have to pay, and firefighters never let someone's house burn. We're comfortable letting people make bad financial decisions when it comes to their television purchases, or the car they drive, or whom they date. We're not willing to do it when the consequence is that they and their children quite literally die in a fire. But that's what free-market firefighting would require.

Even the rock-ribbed conservatives at the National Review aren't comfortable letting the invisible hand refuse to lift a finger to save a family's home. "What moral theory allows these firefighters (admittedly acting under orders) to watch this house burn to the ground when 1) they have already responded to the scene; 2) they have the means to stop it ready at hand; 3) they have a reasonable expectation to be compensated for their trouble?" asked Daniel Foster. Some of his colleagues defended the firefighters, and Think Progress gleefully highlighted the callous arguments.

Have fun trying to repeal health-care reform, guys.

When liberals explain why health care needs an individual mandate, the traditional metaphor is firefighting: Everyone needs to buy insurance for the same reason that everyone needs to buy fire protection. But if you leave the market unregulated, some people won't buy -- or won't be able to afford -- fire protection. And we're not comfortable letting their houses burn down. Similarly, if you leave health coverage to the market, some people won't buy it, and others won't be able to afford it, and then, when they get sick and need it, insurers won't sell it to them. But we're not comfortable letting them die in the streets. Hence, the health-care law.

When Republicans talk about repealing the legislation, they keep the argument abstract. It's about freedom. About American values. About Nancy Pelosi not reading the bill. When they actually try to repeal the legislation, things are going to get concrete in a hurry. It's going to be about this child with that condition being rejected by insurers. And she's going to be adorable, and her parents are going to tearful, and voters will be able to relate.

Already, Republicans are running from that argument, trying to pretend that they'll somehow preserve the protections for preexisting conditions while repealing everything that makes those protections possible. But the bill's unpopular parts are inextricably intertwined with its popular parts. Remove the unpopular ones and you're asking firefighters to sell insurance for homes that are already engulfed in flames.

Here's my prediction for health-care repeal: The GOP will either never really try it, lose on it, or, most likely, cut a deal to add some more conservative pieces to the bill (think malpractice reform, more consumer-driven plans and other things they could've gotten by just negotiating in the first place). But Republicans who think this is going to be easy because public opinion is against the Democrats should remember that before Democrats got a specific bill, public opinion was overwhelmingly on their side. When Republicans are forced to get specific about repeal, they're going to find themselves just as -- if not more -- unpopular. If you're not comfortable explaining why you let someone's house burn down, you're really not going to like explaining why you let insurers turn their sick child away.

Steven Johnson on where good ideas come from:

Ben Bernanke's speech to Congress yesterday was more of a lecture: "Economic conditions provide little scope for reducing deficits significantly further over the next year or two; indeed, premature fiscal tightening could put the recovery at risk," he said. But he went on to warn Congress of the dangers posed by future deficits, and argue for the adoption of "legislative agreements intended to promote fiscal responsibility by constraining decisions about spending and taxes," perhaps by reducing congressional authority "on key budget aggregates, such as total government expenditures, deficits, or debt."

They've not gotten much credit for it, but Democrats have already passed one of these rules with the Independent Payment Advisory Board, which is charged with getting Medicare's spending under control and is protected from the filibusters and congressional inertia that have helped our cost problem grow so quickly.

You'd think people who worry about the market's confidence in our ability to control spending would be shouting about this from the rooftops. The IPAB is the single most significant cost control we've ever imposed on the single most fiscally dangerous program in our budget. But Republicans are specifically targeting it for repeal, even as they praise Bernanke's remarks. Meanwhile, I wonder whether Bernanke even knows IPAB is in there.

We have a system where it seems like it would be in everyone's interest to praise and support this reform, but instead, it's mainly been attacked, dismissed or ignored. Republicans would prefer to win the next election than increase the market's confidence in our ability to balance our books. Frankly, if I were the market, this would make me worry.

Michael Mandel summarizes the findings of a National Science Foundation report on innovation. They're not pretty:

-Only 9% of companies engaged in product innovation in 2006-08. Only 9% of companies engaged in process innovation over the same period.

- Some industries were surprising low. Only 10% of healthcare services firms reported a process innovation from 2006-08.

- Only 8% of finance/insurance firm reported a product or process innovation in 2006-2008
“Companies with R&D; (either performing R&D; or funding others to perform R&D;) exhibit far higher rates of innovation than do non-R&D; companies.”

There's an interesting takeaway in that data: "The concentration of R&D; is in fact a good proxy for the concentration of innovation," writes Mandel. "According to the NSF survey, only 7% of the companies without R&D; report a product innovation over the past 3 years. But 66% of the companies with R&D; report a product innovation."

There's also a scary takeaway: "You can’t be an innovative economy if only 9% of your companies are innovating."

Dave Weigel has a good piece looking at how the conservative reformers who predicted a long wilderness for Republicans unless they changed their core message in this or that direction are reacting to the party's 2010 resurgence. "It now appears that the GOP is about to win without tapping into any of that stuff. The conservative movement's smart set, the people who liberals considered serious critics who could remake the right, really had nothing to do with the Republican Party's great comeback."

This happens a lot, of course. Liberals will remember the post-2004 meltdown in Democratic circles. The party had to move right on national security, on economics, on "family values." You couldn't be the party of less war and more tolerance and win the heartland. Four years later, Indiana went for an antiwar, African American liberal with the middle name "Hussein." In a two-party system, you don't need people to like you to win. You just need them to like the other guys less. Think of it as the bears-and-sneakers theory of democracy.

Which isn't to say that the conservative reformers were wrong. At the end of the day, politics is about more than winning elections. The Republican Party remains in intellectual tatters. Its main two policy ideas -- extending the Bush tax cuts and repealing health-care reform -- will make its main policy concern -- the debt -- much, much worse. It has no answer for our economic moment, for inequality, for the health-care system (Mitt Romney used to have one, but then Democrats took it), for the deficit. You don't need good ideas to win. But you do need them to govern.

Photo credit: M. Spencer Green/AP.

Only a third of Democrats agree that the 111th Congress accomplished more than the average Congress? Sheesh. At this rate, they'll have to blow up the moon before the base admits they're getting more done than usual.

That said, I can't say I share Greg Sargent's (justified) shock. As far as I can tell, what most engaged Democrats know about health-care reform is it doesn't have a public option. Stimulus? Too small. Financial regulation? Something something Elizabeth Warren something?

And that's among the informed. For most of the country, the health-care reform bill won't exist until 2014. As Henry Aaron likes to say, it may be law, but as of yet, it's not reality. People see that unemployment is above 9 percent, not that it's below 11 percent, so where's that stimulus, exactly?

My basic model of American politics -- which is borrowed from political science -- is that voters look at the world around them and then work backward to a judgment on their elected officials. That means they're not really voting on much of what Washington does, as many policies are essentially invisible, and many others have a lag between passage and implementation. Making matters worse, much of what they do know about in Washington -- the defeat of the public option and Ben Nelson's Nebraska kickback -- and some of what they feel back home -- insufficient stimulus -- are legislative outcomes driven by minority obstruction, not by the majority's decisions.

Roll all that together and it's easy to see why people not paying attention might not realize that the 111th Congress has been one of the most productive history. Things feel bad, and what they hear about sounds like standard-issue gridlock and partisan bickering. Change has come, but you really had to be watching for it.

Photo credit: Cliff Owen/AP.

Neil Irwin has a crystal-clear explanation (complete with crystal-clear graphs) of what -- and why -- the economy is so poor right now. "About 7 million working-age people and 5 percent of the nation’s industrial capacity are sitting idle, not producing what they could," he says. That's it. The economy is underachieving. We can make things, but for a variety of reasons, we aren't. Importantly, these reasons do not include all the workers are sick or none of the machinery is functional. The workers can work. The machinery is fine. here's just no demand, as households are filling the hole that the credit bubble left in their balance sheets and businesses are waiting until the economy recovers to begin investing again.

And as for the government? The particular problems in the economy, in fact, match up quite well with its needs: Lots of excess labor and capacity in the construction market, cheap raw materials, and low borrowing costs are a blessing for a country that needs 2 trillion work of infrastructure repairs and upgrades. What the government can, and should, do to get the economy producing closer to its potential is obvious. But since when do 60 votes in the Senate care about obvious?

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At 3 percent growth, unemployment wouldn't return to 5 percent until 2020, reports Neil Irwin: "The nation’s economic woes boil down to this. Compared with a healthy economy, about 7 million working-age people and 5 percent of the nation’s industrial capacity are sitting idle, not producing what they could. The economy is growing again, but at a rate -- less than 2 percent in recent months -- that’s too slow to keep up with a population that keeps increasing and workers who keep getting more efficient. This is the output gap, the divide between the amount the United States can produce and what it is actually producing. The gap, currently $900 billion, explains why we feel so miserable more than a year into what is technically classified as an economic recovery."

Don't miss the interactive graphs: http://wapo.st/bxXnGh

Might I suggest some infrastructure spending? http://wapo.st/9qvGQi

Chicago Fed president Charles Evans has called for bond purchases and a shift in inflation targeting, reports Jon Hilsenrath: "The Fed is now considering whether to add to its $2.3-trillion portfolio of securities and loans by ramping up purchases of U.S. Treasury bonds, in an effort to drive down long-term interest rates and boost growth. Mr. Evans says he favors that, but worries that alone 'would not be enough' to address his concerns. The Fed also needs to push down 'real' interest rates, nominal interest rates minus inflation, to induce households and businesses to part with savings and borrow and spend more, he said. One way to push real interest rates lower is to get inflation higher. The Fed might aim to overshoot its informal 2% target for a time to make up for lost ground, Mr. Evans said."

Paul Krugman and Goldman Sachs's Jan Hatzius worry that Fed overcaution will underpower and thus discredit the effort: http://wapo.st/9zZDcc

Nancy Pelosi and other lawmakers want a Justice Department probe of foreclosure paperwork, report Brady Dennis and Ariana Eunjung Cha: "In a letter to U.S. Attorney General Eric H. Holder Jr., Pelosi and dozens of other Democrats accused the nation's biggest banks of making it difficult for struggling borrowers to get foreclosure relief while the firms routinely evicted them with flawed court papers...The request from Democrats puts pressure on the Obama administration to get more involved on a matter that it so far has said little about publicly. The move is also likely to stoke cries for a broad moratorium on foreclosures across the country."

Jill Biden hosted a White House summit on community colleges, reports Nia-Malika Henderson: "The administration wants to boost the number of community college graduates in the United States by 5 million by 2020, part of its goal of having the highest proportion of college graduates of any country in the world. At the summit, the White House will announce partnerships with corporations and nonprofit organizations that will invest millions of dollars in community colleges. Last year, President Obama tapped Jill Biden to lead the administration's efforts to burnish the reputation of the country's community colleges - she has called the highly accessible, low-cost institutions 'one of America's best kept secrets.'"

But that was a sad consolation prize after $10 billion of proposed funding for community colleges vanished in the Senate: http://bit.ly/cpA6Wx

There's a stimulus plan even deficit hawks should love, writes Maya MacGuineas: http://bit.ly/d5vk3Q

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

Handclap interlude: Glasser's "Home".

Still to come: The cost of bailouts; Obama vs. Orszag; the federal government approved solar projects on federal land; stem cell restrictions threaten scientists' careers; and a cat falls out of a ceiling.

Recap: How Democrats could lose 86 seats in the midterm; why America might soon envy Japan; and the output gap in graph form.

Elsewhere:

1) Anti-libertarian parable comes to life, family's home burns down.

2) Ben Bernanke seems quite willing to tell Congress to save money to reduce the debt, but I bet he'd consider it unwise to tell legislators to spend money for stimulus.

3) Jill Biden is still teaching.

4) People blame insurers for a lot of political outcomes driven by providers.