Derek Thompson

Federal Reserve officials predicted three bleak years for the U.S. economy, and the Federal Open Market Committee announced today that it intends to keep short-term interest rates extremely low until 2014 amid a pondering economic recovery.

In a twist that's both ironic and totally expected, the announcement that the economy will stink for the next three years improved the very, very short term prognosis of the recovery, since the promise of long-term low interest rates coincided with (and probably helped to cause) the bump in stock prices immediately following the FOMC announcement.

The FOMC doesn't have a perfect track record for predicting the future. After all, in early 2006, it anticipated two years of smooth sailing for the U.S. economy, and we all know what happened in the next two years. But it's worth taking a peak at FOMC predictions, via the San Francisco Fed, to understand why the FOMC is confident that inflation will stay put with interest rates guaranteed to kiss zero percent for the next two years.

GDP Predictions
A note on reading the graph: The dark blue band represents the "central tendency of projections" and the light blue band represents the full range of projections.

The upshot is that Fed officials believe the economy will hit 3% to 4% yearly growth in the next three years. That's better than we're expanding now, but it's still worse than most recoveries from past recessions.

Inflation Predictions
Where did the inflation vigilantes go? FOMC members predict PCE inflation to fall in 2012, as energy prices cool off, and hold steady for the next two years.

The president's dilemma: His proposals are both too small-bore to deal with the scale of the crisis he wants to address and also way too big for Congress

Reuters

If you're looking for the ur-text of President Obama's State of the Union address, you could do worse than go back to pictures from September and October 2011 of protesters assembling in Zuccotti Park.

When Occupy Wall Street first captured the nation's attention last year, I remember reading those dozens of placards (on the streets and online) that spoke for the new ragtag populist movement. It struck me as both a beautiful and inauspicious experiment. Here were thousands of struggling Americans finding an honest voice for their fears, touching issues like student debt, income stagnation, and health care costs that really are vital to understanding the plight of the average American. They said "Make the Banks Pay" and "Fix Capitalism" and "Tax the Rich!" But judged against the scale of their challenges, these solutions felt either too broad to stick, or too small to count. (What does "Make the Banks Pay" really mean? How do higher taxes, on their own, revitalize the middle class?)

In short, the protesters were asking questions whose answers would not fit on their signs.

You got the same feeling watching President Obama's State of the Union address Tuesday night. A 7,000-word speech is bigger than a placard. But Obama's address shared the same virtues and shortfalls of the populist movement. Like OWS, the president offered a diagnosis of the middle class crisis that was informed, passionate, and often insightful. Also like OWS, his solutions seemed small, misguided, or confused when matched against the scale of the crisis.*

Americans are struggling, Obama said, not only because of the credit crunch of the Great Recession, but also because of efficiency monster that delivered a greater recession long before 2007. Manufacturing jobs were already disappearing, wages were already stagnating, technology was already eating our work, medical and education prices were already galloping while earnings were trotting.

How do you fix a problem like the greater recession and income inequality? The honest, realistic answer is that solving such a problem is likely beyond the reach of a president or Congress. But the purpose of the State of the Union is precisely to make oversized promises that Congress can underdeliver, so the president offered a laundry-list of measures guaranteed to please liberals and infuriate conservatives for basically the same reason: They cost money.

Oh, this speech doesn't lack for solutions. There's the tax solution (raise effective tax rates on all millionaires above 30%), the industrial solution (focus on manufacturing to drive economic growth), the education solution (pressure schools to lower tuition), the regulation solution (find regulations that are keeping entrepreneurs from starting companies), the deficit solution (exchange revenue increases with mild entitlement reform), the housing solution (a massive refinance plan to save homeowners money today), the energy solution (work with private sector to unlock the potential of natural gas), the infrastructure solution (build more road, bridges, and broadband), the quasi-mercantalist solution (take the trade fight to China and punish companies that outsource work), and the list goes on.

Most of these solutions cost money. Many of them are wise. Some might even have the potential to be transformative. But taken together, they felt scattered, lacking organization or priority, like a sea of Occupy placards -- millions of little messages looking for a Message.

What Obama wants is ultimately what we all want: More good jobs. Manufacturing has hollowed out in the last 40 years, and we're all looking for something to replace it. The economy has reflexively replaced many of those decent-paying jobs for non-college graduates with worse-paying jobs in services, which has lacked manufacturing's efficiency gains. The president suggests a revitalization in manufacturing or energy to fill the hole.

This is a fine ambition. But building a new industry to house the middle class is exceedingly tough work. Reaching for his grab-bag, the president pulls out a couple whoppers. In particular, the emphasis on onshoring work by punishing companies who outsource work is populist gold and policy iron pyrite. When Toyota opens a factory in the U.S., does it mean we're stealing Japanese jobs? Not really. It's more like Toyota has identified a plant in the south as a better stop on its global supply chain. As Don Peck explained this morning, onshoring won't stop the most important thief of middle class work: the march of technology. Instead, Peck wrote, "we need to bend technological progress towards job creation, not just job destruction. That means investments and regulatory changes that can lead to breakthrough technological progress -- the creation of whole new products and industries."

The White House doesn't have a reputation for humility, but they're not so vain as to think they can bend globalization and 40-year trends in a speech. Maybe that's why the president meets two of the most important challenges -- higher education costs and job creation -- with outright pleading, in addition to policy. The president asks businesses to do everything they can to keep jobs stateside and college to "do their part by working to keep costs down."

Perhaps there is honesty in begging. Rescuing the middle class requires bending the medical cost curve, reversing college inflation, building industries, re-training millions of Americans, and all of this after getting the economy back to full strength. This is hard work and long work. And even for those of us who think the president's proposals were too small-bore to deal with the scale of the crisis, the sad reality of things is that they are also way too big for Congress.

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*"Shut up Derek, it was just a campaign speech," is a reasonable critique of that sentence, and the entire column. But read on, please? For me?

Education pays off, in general. But sometimes, so does luck, grit, and natural smarts. The top 10% of earners who didn't go to college earn more than the typical college grad.

The highest earners? They're the highest learners.

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Many kudos to Wonkblog for the legwork in making this chart comparing Mitt Romney's tax rate to past presidential hopefuls':

The loudest story in this chart is the diversity of tax rates among the rich. In 2006, the typical effective tax rate (ETR, for short) for an American family was about 14%. That means the average family paid the federal government one in even seven dollars they earned, through payroll, income and other taxes. Obama paid twice that rate in 2006. McCain paid even more.

But Kerry paid only 13% in 2003 under the same tax law. How come? His tax return here is combined with his heiress wife Teresa Heinz. About half of her money came in the form of investments in tax-exempt municipal and state bonds, the New York Times reported, which made her "the wealthiest spouse of any major party nominee in United States history."

Tax diversity at the top is still the case. Compare Mitt Romney and Newt Gingrich, who paid about $1 million on $3 million of income in 2010. Both men are in the top 0.1% of earners today, which cuts off around $3 million in income. But Gingrich paid an ETR of 32% in 2010, whereas Romney paid an ETR of 14%. Why the gap? It's all in the source of income. Almost all of Romney's income is taxed at a 15% marginal rate because it's investments. Almost all of Gingrich's income is taxed at a 35% marginal rate because it's earned income.

His taxes don't show that he's done anything wrong. They show that the tax code is wrong.

Reuters

Here's what we know about Mitt Romney's money in 2010 and 2011, based on 500 pages of tax returns he released late last night.* He made $43 million in income over those two years. Almost all that money came from investments such as capital gains on investments and compensation from Bain Capital. None of it came from wages.

Here's what we know about Mitt Romney's taxes. Romney has donated more money to charity -- $7 million, including $4.1 million to the the Church of Jesus Christ of Latter-day Saints -- than he owed to the IRS over the last two years. In 2010, Romney's effective tax rate was 13.9%. In 2011, his estimated effective tax rate will be 15.4%. Romney's average effective tax rate is considerably lower than most people in the top 10 percent -- or even the top 0.1% -- because his income comes almost entirely from capital gains, dividends and interest, which are taxed at a lower rate than earned income from wages. Romney's effective tax rate is also lower than that of many middle-class families, who owe payroll taxes, unlike the former Massachusetts governor.

And here's why Mitt's taxes matter. Politically, they matter, quite simply because the people who matter -- those would be the voters -- think they matter. That sounds circuitous. But it's true. Since Romney's wealth and tax rate became an issue, the frontrunner has lost a 10-point lead in South Carolina, watched a 20-point lead reverse itself in Florida, and seen a 19-point lead collapse nationwide. It's impossible to say that Romney's wealth and IRS filings don't matter to voters. They obviously matter.

But substantively, Mitt Romney's wealth doesn't really matter. It's the tax code that matters.

"Governor Romney has paid 100% of what he owes," a Romney spokesperson said on a conference call this morning. I believe him. Mitt Romney is a remarkably successful businessman, and his wealthy reflects a legally gained fortune which is being taxed according to the law.

But the law doesn't make any sense! Consider that over the last two years, Romney has earned $13 million from profits shared by Bain Capital. You might have heard this money referred to as "carried interest." It is earned income. It represents the work of Bain Capital managers. But Romney's share is taxed at 15%, as capital gains, as though Romney's capital were stake at Bain, which it isn't. This freak tax windfall saves Romney, or deprives Treasury, of more than $2 million. 

It's not that Romney tax return proves he's done something wrong. It's that his tax returns prove that the tax code is wrong. Households worth $200 million earning $20 million in investment income a year shouldn't be paying a lower tax rate than some middle class families, especially at a time when we're thinking about cutting spending that disproportionately benefits the lower and lower-middle class.

Romney's tax return could serve as an inflection point in the tax discussion. You might say it already has. Consider last night's TV debate, when Mitt Romney told Newt Gingrich that the former speaker's tax plan goes too far, since it would lower Romney's own tax rate to zero. This was a remarkable moment. The GOP frontrunner, who's won the endorsement of almost every serious conservative mainstay, stood athwart tax-cut-mania conservatism and said, "Stop." Or at least, he said: "Too far."

In an election that will be about inequality and taxes, Mitt Romney tax returns are a glowing artifact of inequality in the tax code. And by proposing to make capital gains entirely tax-free, Gingrich has proposed a tax plan that would make our law even more unequal. That's why, even without the polls, you can fairly say that Mitt Romney's tax returns matter.

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*We will be updating this post as we correspond over the course of the day with our friends at the nonpartisan Tax Policy Center, who are currently reviewing the documents.

The New Yorker website has a great catch this afternoon: a 57-page memo that Larry Summers wrote to Barack Obama to frame the debate over the stimulus. It's a long, detailed, fascinating report, but only one passage is underlined, or bolded, or italicized. In fact, it was so important to Summers, it got all three treatments. It's this one:

But it is important to recognize that we can only generate about $225 billion of actual spending on priority investments over next two years. and this is after making what some might argue are optimistic assumptions about the scale of investments in areas like Health IT that are feasible over this period.

Here's why this passage was critical. The recession was so deep that it might require up to $1 trillion in stimulus, according to economists surveyed by Summers' team. But the federal government could "only generate about $225 billion of actual spending" in Summers' estimation. To fill the gap, the White House would have to rely on less-than-ideal sources of stimulus spending. Those sources were tax cuts and state relief.

Tax cuts are good stimulus, if you want to get money into struggling families' wallets, especially families who are cash-poor and likely to spend their next buck. It's also good politics, because Republicans are more likely to support it than a new spending initiative. But tax breaks are more likely to be saved, especially when families are in debt, which dampens their effect as stimulus (since the point of stimulus is to circulate money, not to increase families' savings).

State relief wasn't Summers' idea of perfect stimulus, either. States would likely use the money to offset tax increases, support old spending programs, or fortify rainy day funds, he wrote. "Although there is less research on this topic, it is not unreasonable to assume that a permanent increase in transfers to the states of 1 percent of GOP increases GOP by about 1 percent after two years," Summers said. Put more simply: State relief, like tax breaks, means filling holes in budgets, not building new things.

The gap between the needs of the economy and Summers' doubts about the capacity of government to spend money effectively is all over this memo, and it's summed up nicely in this paragraph:

Constructing a package of this size, or even in the $500 billion range, is a major challenge. While the most effective stimulus is government investment, it is difficult to identify feasible spending projects on the scale that is needed to stabilize the macroeconomy. Moreover, there is a tension between the need to spend the money quickly and the desire to spend the money wisely. To get the package to the requisite size, and also to address other problems, we recommend combining it with substantial state fiscal relief and tax cuts for individuals and businesses.

There are a few ways to read Summers' observation that a $800 billion stimulus would have to rely on sub-optimal channels. One is that he was totally wrong. They could have hired directly, or they could have authorized a larger road-building program. Another is that Summers was totally right. The stimulus signed in February 2009 should be seen as a hole-filler rather than a real stimulator, since what it really succeeded in doing was to fortify state and family budgets.

The fact that this memo has been out of the public eye for the last three years might suggest to you that the administration would be embarrassed by it. Indeed, the now-famous prediction that the stimulus would hold unemployment closer to 7 percent was proved wildly inaccurate. The White House also clearly underestimated the scale of the housing mess, and failed to come up with a way to address the housing crisis on par with its severity.

But there's quite a lot that Summers and his team got right. He was right to suspect that the tax cuts might be saved by indebted families. He was right to suspect that Republicans would attack state relief as unproductive and rewarding to profligate states. He was right that using the stimulus to fulfill the president's campaign promises wasn't ideal, as far as stimulus goes. He was right that the president would inevitably be on the defensive about deficits caused by lower tax revenues and exacerbated (in the short term, at least) by the stimulus. He was right to predict that deficits would lasso entitlement reform into the big picture. He was right that financial reform was a necessary item on the president's agenda, but that it would prove difficult to build political support for major reform while the banks still seemed sick. And so on.

History might remember this memo as the document that killed any hope for a trilion-dollar stimulus, but it's a rich and complicated report that offers a wonderful look at how Obama's team was grappling with an economic downturn that turned out to be even worse than they imagined.

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President Obama's first big economic fight framed the way the White House views the economy and the GOP


The political story everybody is talking about this morning is Ryan Lizza's monster 11,000-word essay on the president's on-the-job training in political realism. In his campaign, Obama pledged to unearth a unity that lurked beneath the country's partisanship. Today, 30 hours before a State of the Union address that many expect to double as a campaign speech draft, he is moving toward the sort of unsentimental, populist, and (dare I say it?) Clintonian approach from which he once took such pains to distinguish himself.

The most interesting passage drills deep into the debate over the stimulus, which goes all the way back to December 2008. In a secret memo sent just after the election, Larry Summers offered Obama four illustrative stimulus plans to boost the economy, worth $550 billion, $665 billion, $810 billion, and $890 billion. Even the largest of these plans would fill hardly half of the lost productivity in the economy, which economists have sized at $2 trillion. But Summers told the president that it wasn't economically desirable or politically feasible to try to fill the hole entirely...

 "An excessive recovery package could spook markets or the public and be counterproductive," he wrote, and added that none of his recommendations "returns the unemployment rate to its normal, pre-recession level. To accomplish a more significant reduction in the output gap would require stimulus of well over $1 trillion based on purely mechanical assumptions--which would likely not accomplish the goal because of the impact it would have on markets."

And so the battle lines were drawn, with Summers and Peter Orszag calling for stimulus restraint and Christina Romer, the incoming chairman of the Council of Economic Advisers, leading the charge for a stimulus bill worth more than then $800 billion. When Romer tried to move the stimulus conversation toward $1 trillion, Chief of Staff Rahm Emanuel reported responded: "What are you smoking?"

Why is the story of the stimulus still important? It plays into at least three different narratives about the Obama administration and the economy that matter to our understanding of the tumultuous economic debate and the 2012 reelection. First, a few reports have suggested that it was political constraints, and not economics, that limited the stimulus to $800 billion. Lizza's story suggests that $800 billion was considered the largest possible stimulus by both political and economic standards. The most influential voices in the administration considered a larger stimulus not only impossible, politically, but dangerous, substantively.

The second story is a critique you'll hear on the left as often as the right: The White House promised that the stimulus would save us from 9 percent unemployment and instead it allowed 10 percent unemployment. Lizza's story adds to evidence that the administration clearly underestimated the size of this recession. Summers wrote to the president that the economy, which had lost 2 million jobs in 2008, would lose another 4 million jobs in 2009 without a stimulus. By July, the economy was already 4 million jobs in the hole. The economy shed 5 million jobs in the full year, even after passing the largest stimulus plan detailed in Summer's memo. Conservatives see this as a failure of stimulus policy, and they might be right. I tend to see it as evidence that the stimulus, while record-setting, was still too small.

The final narrative is about Obama's relationship with the Republican caucus. The president's most important lesson in politics was arguably his first lesson, when zero House Republicans voted for his stimulus bill. Of the three Republicans who voted for it in the Senate, one, Arlen Specter, would become a Democrat before the end of the year. Three months after the president was elected to uncover the latent unity in U.S. politics, he discovered instead that the only unity in Washington existed in the House GOP, and it was, from the onset, dead-set against him. And so, three years later, the president is running as an unsentimental populist, as leaks of his State of the Union speech suggest, not just because he considers it a superior vehicle for his economic policy, but also because the message of hope has been rendered hopeless.

Newt Gingrich released his tax 2010 tax return last night, revealing that he paid nearly $1 million in taxes on more than $3 million in earned income. Below we've taken a snapshot of the first page of his report. Here's the full thing.

Newt's famously grandiose comparisons to historical figures paint him as an exceptional human being, and when it comes to both earnings and taxes, there is no room for debate: He really is.

Gingrich's income is firmly within the top 0.1% of all earners. In 2011, the cut-off for the top 0.1% of households was $2.9 million, a few hundred thousand dollars below the Gingriches' joint filing. But a 31 percent effective tax rate is similarly exceptional. No surprise there, since Gingrich belongs to the group with the highest average effective tax rate: Those earning between $2 million and $5 million. After that, ETR slides a bit as investment income (which is taxed at a lower rate) makes up more and more of average total income.

In the infamous transcript of the Federal Reserve's first meeting in 2006, the word "[Laughter]" appeared at least 45 times. In one case, Fed Chair Alan Greenspan mocked his fellow economists' ability to predict the future, and the board laughed. Two years later, the global economy fell apart due to a housing meltdown that many Fed economists noted, but discounted. I counted the top ten most ironic laugh lines of the meeting here.

The Daily Stag Hunt did one better: It counted the word "[Laughter]" in every Federal Open Market Committee (FOMC) transcript between 2001 and 2006 -- the bubble years for the housing market. Then they graphed the results.



Does that picture remind you of something? Here's a look at home prices between 2001 and 2006:


Pull back the lens, and here's what happened to home prices when the laughter stopped:

FOMC laughter: Totally random incidence of economic giggling, or the very best coincident indicator we have? You be the judge.

Does anybody care that Mitt Romney is rich? Or is the real meaning of Mitt's money that it heightens and focuses the debate over taxes, inequality, and shared sacrifice in America?

Reuters

Here's a theory. Americans don't care that Mitt Romney is rich.

Maybe it's hard to consider Mitt's money irrelevant with so many people writing and reading about it. On Wednesday morning, the New York Times and Washington Post both led with the news that Romney's overall tax rate was 15%. Later the same day, news spread that he's got money stocked away in the Cayman Islands. And then there's the tidbit that he's given millions of dollars to the Mormon Church in both personal donations and through his family charity.

This is all salacious stuff in a meager news cycle, but when the thrill of the new fades, we'll all  come to terms with the fact that voters really don't care about money, and they never have. The fact that John Kerry married into a billion-dollar fortune didn't stop 59 million people from showing up at the polls in 2004. The fact that the Bushes have a small family fortune and vacation spot in Kennebuckport didn't stop Bush 41 and Bush 43 from receiving 200 million votes over four elections between 1988 and 2004. The fact that Ross Perot was a mega-millionaire didn't prevent him from getting 19 million votes as an independent. If American voters objected to wealth, there would be no elections. Casting ballots for millionaires is a cherished quadrennial tradition.

Mitt Romney isn't merely rich, you might point out. He is really, really rich. But so what? The most admired men in America are already millionaires or better. In a recent Gallup poll the top five most-admired were: Barack Obama (millionaire), George W. Bush (millionaire), Bill Clinton (millionaire), Rev. Billy Graham (millionaire), and Warren Buffett (billionaire).

America's relationship to Warren Buffett's wealth and politics proves that liberals are always ready to embrace the rich, provided they're liberal. Last August, Buffett, the world's third-richest person, urged Congress to raise taxes on millionaires. The left hailed him for being a brave and outspoken champion of the progressive tax code. When Mitt Romney, who would be one of the richest presidents in U.S. history, put out a proposal that amounted to the Bush tax cuts on steroids, liberals attacked him. Buffett and Romney's wealth isn't the issue. The bottom line -- the only line -- is this: Buffett agrees with the left, and Romney doesn't.

THE QUESTION THAT MATTERS

If voters don't care, then why does Mitt's money matter? The easiest answer is that his net worth matters politically, because it can be weaponized for partisan gain by Democrats to excite other Democrats. Another easy answer is that Mitt's money shouldn't matter at all, period.

But maybe Romney's money matters, not for the net worth tag, but for the way it casts into relief some profound questions about wealth, taxation, and welfare in America. It gives a face and a heightened awareness to the debate that was already churning in election 2012.

Romney pays an effective federal tax rate of 15%. Is that appropriate? Maybe you think there are acceptable reasons to want investment income taxed at a lower percentage. The way I see it, a millionaire being taxed the same effective federal rate as a family making between $50,000 an $75,000 is a fixable failure of progressive tax policy. Either way, Romney's money forces that debate, especially since he's proposed extending the Bush tax cuts for the rich while letting the Obama tax cuts for the low-income expire.

Here's another. Several Republican candidates, and conservative writers like James Pethokoukis, think we should slash investment taxes. That would bring Mitt Romney's effective tax rate to zero -- the same as a family in deep poverty. Is that appropriate? Maybe it's really important for you to encourage investment. The way I see it, a dollar we deprive the Treasury is a dollar we have to cut from public services (likely to impact the poor) or raise in other taxes (likely to impact the poorer), making it really irresponsible to cut investment taxes while reducing help for the middle class. Still, Romney's money focuses that debate.

Will a large swath of the public vote for or against Mitt Romney based on the fact that he's worth more than $200 million? I don't think so. That's not what matters. But does Romney's wealth make it harder for him to make the case for conservatism and lower taxes? I don't know the answer. But I think that's the question that matters.

A new survey from the Brookings Institution ranks the world's 200 largest metropolitan economies -- which account for half of global GDP -- from 1-200. And the winners are ...

Jordi AC/Flickr

Shanghai is the fastest-growing city in the world, according to MetroMonitor, a quarterly analysis from the Brookings Institution that compares the 200 most prosperous metros by income and job growth. The victims of the euro zone crisis dominate the end of the list. Athens, Lisbon, and Dublin, the capitals of the three most endangered nations in Europe's sovereign debt crisis, made up the bottom three.

Here are the ten fastest-growing cities (and the ten least dynamic cities) studied by the Brookings Metropolitan Policy Program.

It is sometimes said that geography is destiny. But a tour of the cities dotting the Mediterranean Sea suggests that nearby metros can have wildly divergent fortunes. Turkey is home to three of the most dynamic metros in the world, according to Brookings, including the surprising Izmir. Meanwhile across the Aegean Sea, Athens had by far the worst 2011 of any major city, with the world's largest drops in income and employment. A little further west, three Spanish cities along the Mediterranean coast -- Valencia, Barcelona, and Seville -- were also among the 10 least dynamic cities in the world last year.

"The metro areas at the bottom of the rankings are overwhelmingly affected by the euro zone crisis," said Emilia Istrate, a senior research analyst with Brookings. "This cities are facing national and international crises." Richmond and Sacramento are the only American cities in the bottom ten. "These state capitals are still in decline, not because of international crises, but because of local circumstances," Istrate said. "Government cuts and real estate over-investment from the better years are dragging down growth."

The most important lesson from this survey is a lesson you already know. The fastest-growing cities and countries are almost always in the developing world. As poorer countries join the vibrant global economy and gain access to consumers and investors with considerable means, there is more low-hanging fruit for them to build on a smaller base of wealth. A city like Hangzhou, China, can triple its GDP in eight years. In fact, it did. If a city like San Jose (CA) tripled its GDP in eight years, the median wage would be nearly $200,000.

Izmir, Turkey, and Santiago, Chile, two of the fastest growing cities in the world, are also among the 20 poorest cities in Brookings' survey. In the full list of the richest and poorest metropolitan economies, only Houston finished in the top 20 among both the richest and the fastest-growing metros. That's a remarkable accomplishment for the Texas energy hub, but it's also an indication that "fastest-growing" and "richest" are barely overlapping Venn diagrams.

When you line up the world's biggest metros areas from richest to poorest, what you've got is a world with plenty of room for catch-up. There is a precipitous drop-off from cities like Tokyo and New York to mid-level metro economies like Stockholm, and a long tail that reaches down to Cairo and New Haven.

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If the euro zone finally loses its grip on its super-slo-mo meltdown, the countries paying the highest price might not be the ones confined to the euro, according the World Bank's new morbid report on the global economy.

"Developing countries need to prepare for the worst," the Bank said, describing how the European sovereign debt crisis could spread to every corner of the globe. "In this highly uncertain environment, developing countries should evaluate their vulnerabilities and prepare contingencies to deal with both the immediate and longer-term effects of a downturn."

Thirty developing countries (listed in the chart to the right) rely on external financing for more than 10 percent of GDP. Why does that matter? In the event that global markets freeze up in panic over the euro crisis, these governments and their firms will find it harder to find financing overseas. They're more likely to see a contraction that could come in the form of austerity, layoffs, or reining in of capital investments.

In fact, this is already happening. As Europe grinds to a halt, investment from the continent to the developing world has slowed down in turn. Who's really in trouble?

Consider Egypt, the populist darling of the world after Arab Spring revolts. Egypt ships 40 percent of its manufactured goods to the euro zone. Strike one. It has the precarious distinction of being one of three countries in the developing world with (1) a deficit higher than 5 percent of GDP and (2) a debt/GDP ratio over 75 percent. Strike two. Is firms have some of the highest levels of short-term debt, making them particularly vulnerable to a shock from Europe. Strike three.

Even without a shock, the Egyptian stock market is way off its 2011 high and unemployment has climbed above 11 percent. Perhaps the only bright spot is inflation, which has fallen dramatically in the last half-year -- but much of that is due to the very global slowdown that threatens to starve the country of financing.

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The GOP frontrunner pays the same rate as many members of the middle-class. Here's why that matters.

In graph, X-axis is in dollars and numbers on the top of bars represent effective federal tax rates. Click to enlarge. Data from Tax Policy Center analysis of Mitt Romney's tax plan, which returns most rates to the Bush years.

Mitt Romney's private equity problem is taking a backseat today to Mitt Romney's tax problem. The GOP frontrunner acknowledged that his effective tax rate is around 15%, thanks to the tax code's preferential treatment of income from investments and private equity firms.

As Pat Garofalo explained for The Atlantic, a considerable portion of Romney's income comes from a retirement deal with Bain Capital that continues to pay him a small share of the firm's profits. The wonky term for this cool stream of money is "carried interest" -- the share of investor gains "carried" by the private equity or hedge fund manager.*

You might expect that Mitt's millions would be treated as earned income, because it represents gains from a service rendered by a private equity manager. Normally, that sort of money would be taxed at the top 35% marginal rate. Instead, the tax code treats Romney's retirement payout as carried interest -- investment income from a private equity firm shared among its managers. As a result, Romney pays Uncle Sam only 15% of his Bain Capital income.

In 2009, 15% was the average effective tax rate for households making between $75,000 and $100,000, in the middle quintile of U.S. families. That means Mitt Romney, a mega-millionaire, pays the tax rate as if his were a firmly middle class family, which would seem to pose a considerable political problem to a candidate fighting for middle class votes. To be clear, I don't think it's a moral problem. It's not like it's his fault, or anything. It's just the natural outcome of a tax system designed to give special treatment to investors -- and private equity managers, in particular.

Whether investment taxes should be preferential is a matter for debate. You can think of investment income from, say, a company's stock, as being taxed twice: first by the corporate income tax and second by the investment tax. That's a reason for capital gains taxes to be lower, and lower investment taxes theoretically means more savings and investment. On the other hand, the rich are more likely to invest, and if we want to protect a progressive tax code and raise enough money to fulfill our promises, taxing wealthy people's investment income as ordinary income in the 35% bracket would raise money we would otherwise have to borrow or cut.

Either way, private equity's "carried interest" loophole is not capital gains. Capital gains are income from your own investments. Carried interest is income from other people's investments. "If you manage money for a mutual fund or a public company, you pay regular income taxes," James Surowiecki explained in the New Yorker. "Do it for a private fund, and you pay capital gains." That's backward.

But don't expect Romney to hear much about carried interest from his fellow GOP presidential hopefuls. Under chief rival Newt Gingrich's tax plan, all investment income would be tax free and Romney's overall rate would fall quite near to zero.

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*Bonus background from an explainer we wrote last year:
Private equity and hedge fund managers tend to get paid according to what's known as the principle of 2 and 20. They charge 2% annual fees for managing the portfolio of assets, and they collect 20% of the fund's annual profits.

There's nothing strange about this arrangement. It makes sense to align managers' financial interests with their clients'. There is something strange about the way the government taxes these revenue streams. The 2% fees are considered income, so they're taxed up to the 35% marginal rate. The 20% profit returns are considered capital gains, so they're taxed at the long-term capital gains rate of 15%.

Is this statistic a watershed mark of our decline into socialism, a totally reasonable outcome from the Great Recession, or, somehow, both things at the same time?

Ecotrust

A record-high 49% of the population lived in a household receiving some type of government benefit in the second quarter of 2010, according to Census data reported by the Wall Street Journal. Most of this group received so-called "means tested" benefits like food stamps, subsidized housing or Medicaid. Many are also benefiting from unemployment insurance spending, which has quadrupled since the downturn.

This is the sort of figure I call a Rorschach Statistic, because (a) it's guaranteed to provoke a passionate reaction and (b) that reaction will say a lot about your politics. Liberals are more likely to see this as a symptom of a very sick labor force begging for help. Conservatives are more likely to see it as a symptom of a very sick government that is drowning in bloat and addicted to redistribution.

Both sides have a case. The labor force is indeed quite sick, with a dismal share of working-age adults participating in the economy. But even most liberals would agree that the projected growth of Medicare and Medicaid scream out for a major reform, or at least a tax hike, in the next few years.

Check out this graph showing the huge rise in households receiving government benefits over the last few decades (This does not include EITC or other benefits that flow through the tax code):

A quick glance at this graph might leave you with the impression that Washington has created huge new welfare programs in the last 30 years. But that's not the case.

Of the 20 largest welfare programs considered by WSJ in its analysis, only four of those laws were passed since 1980: The tiny low income home energy assistance program (1981), the TANF program created by welfare's overhaul in the mid-1990s, and the Obama administration's stimulus (which expanded unemployment insurance and food stamps) and health care laws.

Most of this new spending comes from old laws. The most important welfare programs were created in the 1930s (Social Security) and 1960s (Social Security disability expansion, food stamps, Medicare/Medicaid). Most of the increase in government support over the last 30 years has come from demographic changes and economic changes, not from new programs. So it's not that the net is dramatically expanding as much as more people are falling into a net that was already there.

A statistic involving "half of U.S. households" might remind you of another Rorschach statistic: That half of U.S. taxpayers owe no federal income tax. Put both of these facts together, and you get a story of the 20th century that goes like this: Between 1935 and 1965, we spent 30 years expanding welfare options to American households, and between 1980 and 2010, we spent another 30 years cutting taxes to those same households. Our projected deficits aren't much of a surprise when you see the last 80 years as a multi-generational project of cutting taxes to "pay for" increasingly expensive promises.

There is a robust debate today about whether the U.S is slip-sliding toward democratic socialism or lurching into uber-capitalism. One answer is that we've moving in both directions at the same time. Income inequality is rising, and so are transfer payments. Taxes on the rich are falling to generational lows, while a record share of the country is free from federal income tax. Regulations on financial companies fell, while households on the government dole grew.

If it's unhealthy for an economy to rely on so much government support as a matter of habit, it's also the case that federal support for households is exactly what's supposed to happen when economic calamities befall us.

Should colleges be required to prominently post consumer information for prospective students in a report card or "nutrition label" for higher ed? That was our latest question to you in "Working It Out," our collaborative, crowd-sourced column about work and economics. You responded on our site, on college discussion boards, and in our 1,000-person online poll from Toluna.

Earlier this week, we rounded up the first batch of excellent comments. Here comes round two. Keep the answers coming in the comment section, and we hope to publish the best in another batch this weekend. Marty Nemko will weigh in with his take on college report cards on Monday.

Student are investors, and they deserve a financial road map

To those who think that a college education is an invaluable, mind-expanding experience, I would counter that it's an extremely bad idea to take out tens or hundreds of thousands of dollars in loans for an experience that will expand your mind unless you have a very clear idea of how to pay that loan back.  Would you mortgage your house to fund a trip to an Ashram in the Himalayas?  To go on a Hajj to Mecca?  To take a pilgrimage to St Peter's Square?  I should hope not - as valuable as those experiences may be in a spiritual sense, you'd be an idiot to burden yourself with onerous, undischargable debts to experience them.

To those asking why some organization such as US News or a non-profit can't find, organize and distribute this information, I would counter that these organizations don't have a legal means to prevent outright fraudulent information from being provided.  If the government was requiring this, they'd be able to mandate clear, accurate information, with real punishments for organizations that screw it up.

Somehow I recently got on some sort of spam list for for-profit colleges.  I finished college several years ago and am now in professional school.  I'm certainly not looking to dump that to start something else.  Nonetheless, I was deluded with calls and emails from dozens of different schools eager to tell me about how many student loans I was eligible for.  I looked into a few of these places out of curiosity.  Many of them appear to essentially be scams to get student loan money from the government in return for neither particularly educating nor providing worthwhile skills to their gullible students, who end up saddled with debt.

Sure, if you're willing and able to pay for college out of pocket, and you view it as simply a mind-expanding self-improving project to better yourself, you have no need to see a financial breakdown of what's happened to other students who've traveled that path.  But if you're taking out loans (which makes it something of an investment) backed by the federal government to pay for school, I don't think it's too much to ask that the federal government require that school to issue you a prospectus describing the past performance of this investment for others.

Colleges should open up their books for students

I'd rather see them publicly announce summaries of their budgets.  As in, how much is going into salaries, how much is going into providing financial aid, how much is used in buying equipment, and how much is used to buy real estate/political clout/other things colleges should not be spending that much money on.

Colby College responds

Debt is a key factor in the case for the college report card, which specifically mentions
debt incurred by students at places like Colby College. In fact, Colby shares these concerns about debt, which is why we offer grants, not loans, in financial aid packages.

You can't measure college with dollars signs

If education is only based on future earnings, we will become continually collectively less educated, and this will continue over time. Greed does not breed intellectual curiosity, scientific pursuit, nor literary acumen. If your sole purpose is to make money, you're just not curious. You're avaricious.  Basing an educational system on monetary gain is hopeless. Basing an economics system that rewards intellectual achievement is wise.

A college report card wouldn't be useful to all students, but it would help many

I don't think it's crazy at all to think that university students should be there to learn. I do, with some continuing hesitation, believe in the mission of the liberal arts. However, I think it can be taken too far--and that is what people are concerned about.

It all depends on what students you're thinking of. I don't look askance at a business undergrad who has no illusions that she's at university because she has to be in preparation for her MBA. Same with those preparing for law school or med school... and as they are there with clear motives and know they are headed for a professional degree, I can somewhat sympathize with being irritated at many of the common general education requirements. You can make a 'rounder, fuller person' argument for a Great Books or European History survey course, but nowadays such things are getting harder to find... a student nowadays is more likely to find course catalogs full of courses with titles like 'The Mestizo Woman in the Literary Mind' or 'The Recontextualizing of the Polish-Lithuanian Body.' Fascinating stuff, usually, but too narrow and too political for the general liberal arts mission.

The other side of the pendulum is the student studying for a degree in, say, East Asian and Asian Diaspora Studies or LGBT Studies (or, well, any department the name of which is 'Somethingsomething Studies').  I applaud the pursuit of pure knowledge, but exactly what job does that qualify you for, beyond another 5-8 years of student debt for grad school in the same department and then a shot--a long shot--at a professorship in the same department? The most common job out of school for my dear friends with humanities degrees has been... receptionist.

Lurking between these two poles are kids who don't have any place in the university at all. They aren't pursuing a degree with any career in mind, nor for any love of learning, but just because someone somewhere along the way told them that they had to go to college, that education debt was 'good debt,' or some other variety of nonsense. (To my mind, the only good debt is debt you didn't incur.) These are the kids I really do feel sorry for; years of nondischargeable debt, no marketable skills, and the opportunity cost of having foregone four or ten years of earning capacity.

Great idea, difficult execution

1. I think it will be difficult to get figures. for example lets say you want to know how many grads of a particular school got jobs? Well if they got a job at Burger King thats a job isnt it? So it would be hard to word the survey.

2. Jobs come and go. For example just 5 years ago their was a teacher shortage. So students flooded that market. What it would come down to is students being always worried about that years ranking and we dont want them chasing majors.

Dont get me wrong, it's still a good idea. Yet it will have problems.

BTW, what I would like to see is having college professors graded, and paid accordingly, on how well they actually can teach. A proff might hold a Noble prize but that doesnt mean he can teach. Colleges need to develop the BEST instructors.

 Aren't students also responsible to watch out for their investment, "report card" or no?

I think the one thing all of this misses is the student's responsibility to their own education. Simply taking out loans without a plan is a bad decision and pointing solely to the trillion dollar student debt is misleading. Neither fully address the problem. 

1) The Trillion Dollar student loan debt is disproportionally represented by students entering "For-Profit" colleges, those are your online schools such as University of Phoenix, Cappella, DeVry, and others. Those students attending "For-Profit" schools disproportionally leave school unemployed and hence default on their loans. Those are also the schools that drive up the on-average cost of college. For instance a student attending a University of Phoenix is likely to pay more per term than a student attending an in-state community college or state public institution. 

2) College is a mix of public good and educational experience. Students need to be wise consumers of the product. Often students want the convenience of college and pay for that convenience at the expense of their own future. Not every student should attend a four-year university and not every university is created equal. Also, students share in their success. The time students are willing to put in will impact their future successes in a career. 

3) I am tired of this argument against higher education. I often here people throw names like Steve Jobs, who did not graduate college, or Mark Zuckerberg, who did not graduate college, out as an attempt to diminish the importance of Higher Ed. I like to point out that while those two, and countless others, did not graduate from their institution the attendance at their higher education institution helped spur, and in Zuckerberg's case, became the impetus for their creation. Hence their creations were a product of the chance to pursue their passions in an educational setting. These highly successful individuals serve as illustrations of the importance of higher education. 

4) Unless you are paying for a name, college education still does not cost over $100,000 for a B.A. or a B.S. Public institutions have sacrificed pay to faculty and staff in an attempt to keep costs low. A student can attend their in-state public institution and receive an excellent education for an affordable cost. Schools such as Colorado State University, Oregon State University, and many others cost a reasonable amount. Colorado State University cost $8,000 for a year of  full time tuition, if one attends for 4 years that is $32,000. If one were to spend the first two years receiving an associates degree from a community college the total cost of a bachelors would be $20,000. Now, this does not include living expenses. But to put that in perspective, after a complicated search you can find that University of Phoenix charges $44,000 for the same degree, again that does not include living expenses or fees (which are more at University of Phoenix), and is priced at the in-state residence rate.

5) If you include living expenses, there are a plethora of on-campus jobs that helps students build skills, pay for room and board, and provide enough for living expenses. Even if you pay out of pocket say $40,000 and that helps you get a job starting at $30,000 your college education has paid for itself in just over a year of salary. So I would ask when you look at the job you get and the salary you have, it took you four years to incur the debt and only a year and a few months to make that total cost in a salary. Now, it takes a lot longer to pay it all back, of course, but to say that college wasn't worth it when you make the cost of four years of tuition in one year is a stretch.  

I think the collegiate system needs some changing and tweaking. But I think overall our higher education institutions have produced and continue to produce some very great things for the US and the entire world. They continue to innovate and collect great minds together to help solve problems for the public good. They also provide a reasonably inexpensive way for those in poverty to work their way out of poverty. I believe that there are only two ways out of poverty, education or the military. It is sad that we continue to cut both, while simultaneously cutting welfare.

Don't blame the schools, blame the students

The problem is far more fundamental than the availability of "report cards."  The information is out there; I certainly had access to it when I was in high school.  I hear too often the excuse "but they're just kids and they don't understand what they're getting into!"  If that is the case, the problem is that the students aren't even thinking to seek out this information when investing--in this case, in 4-5 years of their lives for school in a major and going into debt to do so. 

That kind of information needs to be ingrained in the student before even entering college.  Only then will education-investment concepts take hold, and the information in the report cards be relevant.

We can't keep our own fitness promises for the same reason that addicts are addicts and Congress can't pass deficit reduction

Zurijeta /Shutterstock

Every January, millions of Americans, brimming with optimism and a little extra belly from the holidays, commemorate the new year by making an unfamiliar urban trek. They go to the gym.

One in eight new members join their fitness club in January, and many gyms see a traffic surge of 30 to 50 percent in the first few weeks of the year. Stop by your local gym today, and the ellipticals will be flush with flush new faces. But next thing you know, it will be April, our gym cards will be mocking us from our wallets, and our tummies will have sprouted, on cue with the tree buds.

Economists make and break gym promises just like the rest of us. And, as they're considerably more likely to run statistical regressions on their personal lives, there's a healthy academic literature about going to the gym. Here's what economics can teach us about fitness and the fitness industry.

WHY CAN'T PEOPLE KEEP THEIR GYM PROMISES?
FOR THE SAME REASON CONGRESS CAN'T PASS DEFICIT REDUCTION.

People are way too optimistic about their willpower to work out, Stefano Dellavigna and Ulrike Malmendier concluded in their famous paper "Paying Not to Go to the Gym." In the study, members were offered a $10-per-visit package or a monthly contract worth $70. More chose the monthly contract and only went to the gym four times a month. As a result, they paid 70 percent more per visit than they would have under the plan they rejected. Why? Because people are too optimistic that they can become gym rats, which would make the monthly package "worth it." Silly them.

You might call this behavior "laziness." Economists prefer "hyperbolic discounting." This is the theory that we pay more attention to our short-term well-being and "discount" rewards that might come further down the road. Think of a small reward in the distant future, like taking a nap three weeks from now. Doesn't hold much appeal, does it? But when the small reward is imminent -- Take a nap right now? Woo hoo! -- it's considerably more attractive. Given the choice between small/soon rewards versus larger/later benefits, we'll take the former. Hyperbolic discounting helps to explain why Congress can't pass deficit reduction, why drug addicts stay addicts, why debtors don't pay off their bills, and why you keep telling yourself that the right day for exercise is always "tomorrow."

The other problem with sustaining the motivation to work out is that ... well, motivation is exhausting! According to the theory of decision fatigue, the simple act of making any decision depletes us of a limited store of willpower. Exercise isn't just an investment of time, it's also a choice -- and a difficult, even exhausting choice for people whose daily habits don't involve running and lifting.

SO, HOW DO I TRICK MYSELF INTO WORKING OUT MORE?
PAY YOURSELF.

Think about what you're paying for at the gym. The machines, the free weights, the televisions, the shower. But aren't you also investing in motivation? A membership is different from a one-time purchase. It's also a promise that you expect your future self to uphold. But too often, a membership isn't enough to keep us at the gym. Maybe the nudge we need is just ... money.

A 2009 study out of the University of California-Santa Barbara reached the unsurprising conclusion that people are more likely to work out when rewarded with cash. Go to the gym once, and the results can be hard to see. Collect a check at the gym, and the results are in your pocket. But let's assume you can't find somebody to pay you to work out (a likely assumption). The solution is to find somebody to tax you for not working out.

Recently, a couple of Harvard graduates launched a program called Gym Pact based on the simple principle that if skipping the gym is a broken contract with ourselves, we ought to pay a penalty for slacking. So Gym Pact charges your credit card a penalty of at least $5 if you fall short of your work-out goal each week.

"If there's a cavity, you know it needs to get filled in, but if it doesn't hurt right now, you may not bother,'' one of the founders told the Boston Globe. "In traditional gym memberships, not going is not very costly. In this one, you actually might feel the pain of not going immediately.''

That's a fine idea to get people to spend more time at the gym. Too bad your gym has different plans.

DOES MY GYM WANT ME TO WORK OUT MORE?
PROBABLY NOT.

Gyms make most of their money from two sorts of people: 1) Absentee members and 2) super-users who pay not only the monthly fee but also for the add-ons, like trainers and classes, all the way down to the whey smoothies.

"Commercial health clubs need about 10 times as many members as their facilities can handle, so designing them for athletes, or even aspiring athletes, makes no sense," Men's Journal explained in Everything You Know About Fitness Is a Lie. One way to build a financially efficient gym is to make it appear really financially inefficient for gym rats:

The winning marketing strategy, according to Recreation Management Magazine, a health club-industry trade rag, focuses strictly on luring in the "out-of-shape public," meaning all of those people whose doctors have told them. The entire gym, from soup to nuts, has been designed around getting suckers to sign up, and then getting them mildly, vaguely exercised every once in a long while, and then getting them out the door.

Now is the winter of our idleness. In January, our cup of willpower overfloweth. But by June, the odds that you've kept your New Year's Resolutions falls to under 40 percent. On the bright side, your flabby willpower means open weight machines for other gym members. Our laziness isn't good for our fitness, but it just might be good news for the fitness industry.

When the full history of the Great Recession is written, January 31, 2006 might represent the moment the nation's best economists caught their first glimpse of the housing catastrophe ... and laughed.

Yesterday, the Federal Reserve released the transcript from its 2006 meeting, in which fears about the housing crisis were downplayed and nearly all participants agreed that the economy would continue to grow for the next two years. In fact, later that year, national income growth would turn negative. The next year, we officially entered a recession.

The word "[Laughter]" appears in this soon-to-be-famous Fed transcript at least 45 times. In retrospect, it was mostly gallows humor. Fed Chair Alan Greenspan chides his board's ability to predict the future, and the board laughs. David Stockton makes an unintentionally prescient joke about part-time retirees. Tim Geithner, and many others, lavish the outgoing chairman with effusive praise and predict clear skies ahead. Here are the ten most notable, ironic, or actually laugh-worthy laugh lines, in order of their appearance in the transcript:

Alan Greenspan on the Fed's inability to predict the future: "The spread between the thirty-year [interest rate] and the fifty-year is really quite pronounced. And it is suggesting that it cannot be an economic forecast. We have enough trouble forecasting nine months." [Laughter]

David Stockton on part-time work in retirement: "I would suspect that workweeks would tend to decline later in an individual's life cycle, certainly relative to the prime age working years." (Greenspan: "Individuals also may be more affluent so that they have an ability to actually--") "Or affluent and more likely to be taking on part-time work in retirement." [Laughter]

Alan Greenspan on lunch: "In the eighteen years I've been here, we've gone from an average presentation of three minutes to one of six minutes." [Laughter] "The drift has been inexorably upward. And I will suggest to you that, unless we are somewhat unusually restrained today, we're going to run way over what our luncheon plans are, and we will be forced to call them dinner." [Laughter]

Janet Yellen on Alan Greenspan: "If I might torture a simile, I would say, Mr. Chairman, that the situation you're handing off to your successor is a lot like a tennis racquet with a gigantic sweet spot. [Laughter]

William Poole on naming Greenspan's next two books: "Given my interest in making sure we have clear communication, I have a suggestion for a title for your [Greenspan's] first book. It is in line with some books by your predecessors. So I suggest The Joy of Central Banking. [Laughter] And I suggest that your second book be More Joy of Central Banking. [Laughter] 

Alan Greenspan on a title for his book: "How to Be a Joyous Central Banker, Even Though We Don't Have Hearts." [Laughter]

Tim Geithner on thanking Greenspan: "I'd like the record to show that I think you're pretty terrific. [Laughter] And thinking in terms of probabilities, I think the risk that we decide in the future that you're even better than we think is higher than the alternative." [Laughter]

Susan Bies on thanking Greenspan: "As an old risk manager, I was glad to feel right at home with your approach to monetary policy." [Laughter]

Roger Ferguson on thanking Greenspan: "As a mere cadet, if you will, sitting next to the monetary policy Yoda..." [laughter]

Donald Kohn on the his optimism about the economy: "My forecasts for 2006 are very close to those I submitted last January and June. That's partly a product of innate stubbornness." [Laughter]

What the Fed's remarkable pre-crash meeting -- and a similar transcript from the doomed Air France 447 flight -- teaches us about crisis and confidence

Reuters

There is something utterly engrossing about witnessing the spectacle of blithe ignorance in the face of impending doom.

So it is utterly engrossing, not to mention frightening, to read the January 2006 transcript of the Federal Reserve's eerily calm meeting at the dawn of the housing market's slow-motion meltdown. Consider some of the inauspicious details. Days after a sharp GDP decline, the Fed broadly considered the warning sign a statistical aberration. They characterized the housing crisis as a limited risk. Members praised Greenspan's tenure not only as unblemished, but also as a launching pad for years of steady growth. It's a grim scene, and it reminded me of another spookily casual transcript -- from the cockpit of doomed Air France flight 447.


On June 1, 2009, a plane carrying 228 people plunged into the Atlantic Ocean, in what became one of the greatest mysteries in modern aviation. How did a "technologically state-of-the art airliner" vanish into the water? As Popular Mechanics explained, it began with a storm and ended with simple human error.

Air France 447 had flown head first into a large system of thunderstorms. The captain left the cockpit to take a brief nap (he would return before the end), leaving the plane in the hands of thoroughly trained pilots. The time was 2:02 AM. Fifteen minutes later, everyone on board would be dead in the ocean.

Very soon, ice accumulation began to interfere with the speed sensors. An inauspicious aroma seeped into the cockpit. The pilots reacted with a bizarre combination of hasty actions and lazy thinking. When the plane had stalled, the pilots ignored the loud stall alarms. Their reaction -- to pull back on the stick -- was the exact opposite of what they were supposed to do in the situation. They assumed the plane's computer would prevent them from making a catastrophic mistake. But they failed to see that the computer had switched into an alternative mode that made it easier for them to stall the aircraft 30,000 feet above the ocean.

As the pilots pushed the plane's nose higher and higher in the sky, the plane did stall -- and fall. But none of pilots ever used the word "stall" in the transcript, including the captain, who returned in time to stop the crash, but failed. Nobody even diagnosed the problem until precisely 2:13 AM and 42 seconds in the black box log. It was too late. Forty-eight seconds later, AF447 and all 228 passengers hit the ocean.

And so, a highly advanced cockpit stocked with highly trained professions failed to avoid an utterly avoidable tragedy because of a mix of confusing conditions, overconfidence, and human error. I hope that, by laying out their circumstances so broadly, you'll understand where I see the parallels with the 2006 Fed meeting.

***

On January 31, 2006, a group of economic luminaries, including Alan Greenspan and Tim Geithner, gathered around a long ovular table in the offices of the Board of Governors of the Federal Reserve in Washington, D.C., to discuss the economy and send off Greenspan, the captain of the Fed.

At the time, warning signs abounded. The U.S. economy had already begun the epic free fall that would lead to recession in late 2007, cataclysm in late 2008, and 10% unemployment by 2010. The housing boom was mid-bust, with home ownership peaking at 69.2 percent in late 2004. (It has since fallen to below 60%, if you include delinquent mortgage borrowers.) Just days before the Fed meeting, the country had learned that GDP growth in the fourth quarter of 2005 had slowed to 1.1%, led by a nasty decline in consumer spending.

Still, practically all the participants said full-speed ahead. Even Janet Yellen, who did express some concerns about the housing market, told the departing Greenspan "that the situation you're handing off to your successor is a lot like a tennis racquet with a gigantic sweet spot." Eleven months later, after total national income had already begun shrinking, Tim Geithner, then president of the Federal Reserve Bank of New York, told his colleagues: "We think the fundamentals of the expansion going forward still look good."

Mistakes directly leading to the deaths of 200 passengers are a very different beast than mistaken economic forecasts, which (as part of a group of culprits including Wall Street greed, regulator incompetence, and home-buyers' ignorance) indirectly led to a great and devastating recession. But like the pilots, the Fed's failure was not a matter of education or training. These were among our greatest economic thinkers. Quite like the pilots, they trusted the mechanics of a complex system they did not fully understand, especially the connection between the housing and financial markets. Amazingly, in retrospect, they often emphasized inflation concerns over housing concerns and the health of Wall Street. ("Markets are now so much more developed and sophisticated that maybe it's different this time," Dino Kos told Greenspan.)

"The problem was not a lack of information," Binyamin Appelbaum writes in the New York Times. "It was a lack of comprehension, born in part of their deep confidence in economic forecasting models that turned out to be broken." It was total systemic failure, from 2006 into 2008, to diagnose a crisis and act to stop it, based partly on overconfidence that, in the economy, we had built an unstallable machine -- that the plane could, quite certainly, fly itself.


Air France 447 is deep in the ocean, and our economic malaise feels similarly unrecoverable. But there may be simple lessons to learn from these tragedies of expert overconfidence and strategic blindness.

"Today the Air France 447 transcripts yield information that may ensure that no airline pilot will ever again make the same mistakes," Jeff Wise writes at the conclusion of his story.

From now on, every airline pilot will no doubt think immediately of AF447 the instant a stall-warning alarm sounds at cruise altitude. Airlines around the world will change their training programs to enforce habits that might have saved the doomed airliner.

One hopes the lessons of 2006 will reverberate in the world economic community, as well. But you need only look at the debate over debt in the developed world to see that we have emerged from the Great Recession even more divided than we were going in. Across the Atlantic, the European economy is crashing. Its leaders are paralyzed by politics and uncertainty. The transcripts of the next crisis are being written as we speak.