Oops

According to the BEA, GDP growth went negative in the fourth quarter of 2012:

Real gross domestic product -- the output of goods and services produced by labor and property
located in the United States -- decreased at an annual rate of 0.1 percent in the fourth quarter of 2012
(that is, from the third quarter to the fourth quarter), according to the "advance" estimate released by the
Bureau of Economic Analysis.  In the third quarter, real GDP increased 3.1 percent. 

Senate Coalition Makes Immigration Play

Members of the Senate released their plan for immigration "reform" and a "normalization" (legalization) of illegal immigrants.  The four key principles of this measure:

Four Basic Legislative Pillars:
1. Create a tough but fair path to citizenship for unauthorized immigrants currently living in the United States that is contingent upon securing our borders and tracking whether legal immigrants have left the country when required;
2. Reform our legal immigration system to better recognize the importance of characteristics that will help build the American economy and strengthen American families;
3. Create an effective employment verification system that will prevent identity theft and end the hiring of future unauthorized workers; and,

4. Establish an improved process for admitting future workers to serve our nation's workforce needs, while simultaneously protecting all workers. 

 Once you dig underneath this vague language, though, the actual details of the legislation might be more problematic.

David Frum argues that a massive legalization could undermine conservative policy goals while not helping Republicans electorally, a point Ross Douthat echoes.  Mark Krikorian notes that promises of enforcement of immigration law are rarely delivered on.  Mickey Kaus has 6 major questions regarding normalization.

The National Journal games out the legislative path for a legalization.  The House could stop this measure easily, but reportedly a secret committee of Republicans and Democrats have been meeting to try push some legalization through.

Fitch: Play Nice, Washington

A report out from the ratings agency Fitch suggests that the company will downgrade the USA's AAA credit rating if Congress fails to raise the debt ceiling in a timely fashion:

Fitch Ratings' expectation is that Congress will raise the debt ceiling and that the risk of a U.S. sovereign default remains extremely low. Nonetheless, and in line with our previous guidance, failure to raise the debt ceiling in a timely manner will prompt a formal review of the U.S. sovereign ratings. On 31 December 2012, U.S. federal government debt reached the statutory debt limit of USD16.394trn and consequently the Treasury has begun to implement extraordinary measures that will create an estimated USD200bn of additional headroom under the debt ceiling. A repeat of the August 2011 'debt ceiling crisis' would oblige Fitch to review its current assessment of the reliability and predictability of the institutional policy framework and prospects for reaching agreement on a credible medium-term deficit reduction plan.
In Fitch's opinion, the debt ceiling is an ineffective and potentially dangerous mechanism for enforcing fiscal discipline. It does not prevent tax and spending decisions that will incur debt issuance in excess of the ceiling while the sanction of not raising the ceiling risks a sovereign default and renders such a threat incredible.
So a refusal by Congressional Republicans to raise the debt ceiling and strike a deal with the president could cause the ratings agency to lose faith in America's abilities to pay its bills.

 But there's a warning for the president, too:

The U.S. 'AAA' status is underpinned by the country's relative economic dynamism and potential, diminishing financial sector risks, respect for the rule of law and property rights, as well as the exceptional financing flexibility that accrues from the global benchmark status of U.S. Treasury securities and the dollar. These fundamental credit strengths are being eroded by the large, albeit steadily declining, structural budget deficit and high and rising public debt.
In the absence of an agreed and credible medium-term deficit reduction plan that would be consistent with sustaining the economic recovery and restoring confidence in the long-run sustainability of U.S. public finances, the current Negative Outlook on the 'AAA' rating is likely to be resolved with a downgrade later this year even if another debt ceiling crisis is averted. 

So Fitch (and no doubt others) are looking for a plan to reduce the deficit's burden in the medium term.  It's not demanding immediate cuts, but it is looking for a more positive trajectory.  Cooperation from both parties may be required to realize this trajectory.

Slow Growth, Slow Gains

In the New York Times, two separate but related stories.  The first notes that gains in economic productivity have not been matched in gains by compensation.  The median hourly wage has increased, when adjusted for inflation, by only 4% since 1973.

For the great bulk of workers, labor’s shrinking share is even worse than the statistics show, when one considers that a sizable — and growing — chunk of overall wages goes to the top 1 percent: senior corporate executives, Wall Street professionals, Hollywood stars, pop singers and professional athletes. The share of wages going to the top 1 percent climbed to 12.9 percent in 2010, from 7.3 percent in 1979.

Some economists say it is wrong to look at just wages because other aspects of employee compensation, notably health costs, have risen. But overall employee compensation — including health and retirement benefits — has also slipped badly, falling to its lowest share of national income in more than 50 years while corporate profits have climbed to their highest share over that time.

Conservative and liberal economists agree on many of the forces that have driven the wage share down. Corporate America’s push to outsource jobs — whether call-center jobs to India or factory jobs to China — has fattened corporate earnings, while holding down wages at home. New technologies have raised productivity and profits, while enabling companies to shed workers and slice payroll. Computers have replaced workers who tabulated numbers; robots have pushed aside many factory workers. 

Elsewhere in the NYT, Annie Lowrey argues that low growth has contributed to political dysfunction:

Consider how different our politics might be today if the economy had not collapsed in 2008 and not been mired in sluggish growth ever since. A ballpark estimate suggests that if the economy were to grow one percentage point more than expected in each year over the next 10, the deficit would shrink by more than $3 trillion. That would be more than enough to set the ratio of our debt to our annual economic output on a comforting downward trajectory. Moreover, it would happen without making cuts to a single program, like Medicare or food stamps, or without raising a single dollar of additional tax revenue. Even a much smaller boost to growth — say one-tenth of a percentage point per year, or even half that — would make Congress and the White House’s burden hundreds of billions of dollars lighter. 

While I might note that growth prior to 2008 wasn't exactly supercharged, Lowrey's broader point has some merit.  We can also connect these two points: the decline of popular prosperity could also be harming the ability of the economy as a whole to grow, and this slower growth saps the vitality of government finances.

Expulsion Differences

The Washington Post dug into the expulsion rates at DC schools and found that charter schools expelled students at a far higher rate than traditional public schools:

D.C. charter schools expelled 676 students in the past three years, while the city’s traditional public schools expelled 24, according to a Washington Post review of school data. During the 2011-12 school year, when charters enrolled 41 percent of the city’s students, they removed 227 children for discipline violations and had an expulsion rate of 72 per 10,000 students; the District school system removed three and had an expulsion rate of less than 1 per 10,000 students.

So the expulsion rate at DC charters was over seventy times that of traditional public schools.  Expelling poorly behaved students could be a strategy that these schools use to improve test scores.  Whether one supports the use of expulsion as a pedagogical tactic or not, this report does make clear that DC charters and traditional public schools are operating on very different disciplinary playing fields, which makes it more difficult to compare their academic performances.  The law has made it very difficult for traditional DC schools to expel students, forcing them to educate everyone.  Charters do not operate under the same public demands.

Moreover, as a factor only hinted at in this story, charters also have the ability to more credibly threaten expulsion.  This threat could also affect student behavior.  And, as this story notes, many charters offer students the ability to voluntarily leave the school instead of being expelled; these "voluntary" removals are not included in the tallies of expulsions.

Moody's: Fiscal Cliff Deal a Mixed Bag

After the fiscal cliff deal passed, Moody's, which still gives the USA a AAA credit rating, warns that further deficit reduction will be needed:

Moody's Investors Service said that the fiscal package passed by both houses of Congress yesterday is a further step in clarifying the medium-term deficit and debt trajectory of the federal government. It does not, however, provide a basis for a meaningful improvement in the government's debt ratios over the medium term. The rating agency expects that further fiscal measures are likely to be taken in coming months that would result in lower future budget deficits, which are necessary if the negative outlook on the government's bond rating is to be returned to stable. On the other hand, lack of further deficit reduction measures could affect the rating negatively. Notably, yesterday's package does not address the federal government's statutory debt limit, which was reached on December 31. The need to raise the debt limit may affect the outcome of future budget negotiations.
Although the fiscal package raises some revenue through higher tax rates on individuals earning more than $400,000 ($450,000 for joint filers) and through some other smaller measures, the estimated amount of increased revenue over the next decade is far outweighed by the amount of revenue foregone through the extension of lower tax rates for those with incomes below $400,000, the indexation of the alternative minimum tax, and other measures. 

This portion of the ratings report seems to be generating the most headlines.

But there's another portion of the statement suggesting that this deal was a net economic positive:

The macroeconomic effects of the package are positive, since it averts the recession that would likely have occurred had personal income taxes gone up for all income levels. However, the increase in the Social Security payroll tax from 4.2% to 6.2% of income that became effective on January 1 will likely be a constraint on growth in coming quarters. Furthermore, expenditure cuts that may be decided in coming months could also affect the rate of GDP growth in the near term. Overall, therefore, the recent package mitigates part of the fiscal drag on the economy associated with the fiscal cliff but does not eliminate it. 

 That paragraph is one McConnell and Boehner might take some solace in, along with President Obama and his allies.

Perhaps the principal thing driving the debt over the short and medium term is the sluggish economy.  Keeping the economy from slipping into a deep recession is also a powerful deficit reduction tool.  Both Republicans and Democrats could keep that in mind.