Fed Chairman Bernanke and other central bankers are walking a tightrope, with deflation on one side and inflation on the other. In a circus, the tightrope walker can see how much further he must go to reach his destination and how far he will fall if he loses his balance. Central bankers lack the tightrope watcher’s knowledge. Tightrope walkers have a less risky occupation.

What was surprising is how the visiting delegation prepared for its visit to First Boston. Specifically, using newly-available Lotus 1-2-3 software (then limited to 128 columns!),  they had prepared a 100-year (yes, a hundred-year!) spreadsheet of financial projections. To put it mildly, everyone at First Boston who was involved in the negotiations was dumbfounded. Nobody in the West would put together a 100-year projection, the obvious reason being that the uncertainty level looking out that far is off the charts. The less obvious reason involves the time value of money. In a world in which inflation is the norm, the value of money received in the future is less than the value of money received now. All financial decisions involve an estimate of the net present value of a stream of future receipts. For an investor in a stock, what matters is the net present value of a projected stream of dividends. For a businessman, what counts is the net present value of a stream of profits generated by a capital spending project.

The net present value of dividends or profits generated in the 50th or 100th year after a financial decision is made is very close to zero. Even if the projections made by the Japanese had been believed (which they weren’t), it wouldn’t have mattered.

All of this is by way of introduction to a recent essay written by Jeremy Grantham,  co-founder and chief investment strategist of  the Boston-based money management firm GMO (Grantham, Mayo, Van Otterloo, LLC). The essay, titled “Your Grand Children Have No Value (And Other Deficiencies of Capitalism)” is part of his latest quarterly letter.

It’s not often that a card-carrying capitalist writes about capitalism’s shortcomings. His words are thought-provoking, to say the least. That’s why I’m posting an extensive excerpt. Here it is:

Capitalism has gone through a Darwinistic series of trials and errors, which still continues. For the time being, capitalism has tuned itself to rapid growth at almost any cost. Circumstances such as the hydrocarbon revolution and the ensuing population explosion have allowed for both high growth and high profit margins to sustain the growth. Sustained high margins have in turn trained capitalists – or corporate executives if you prefer – to set high hurdles for all investments. The 14% hurdle for discount rates that was considered a minimum in the late 1990s, for example, halves the future value of a dollar every 5 years, so that in 10 years today’s dollar is worth 25¢; in 20 years 6¢; and in 50 years one tenth of one cent! It is hardly surprising that any event out that far is ignored.

For example, let us say that a firm’s current actions are going to cost society at large a billion dollars’ worth of harm in 50 years. Further, let us agree that all of the costs will definitely be imposed on the company. The company would feel that pain today as equivalent to only a mere $1 million hit to earnings. Why should they care?

In contrast, the income of typical individuals is likely to compound at most at 1.5% a year, their risk-free investments at an imputed zero % (today’s 30-year bond minus inflation), and an equity investment at perhaps 4%, net of inflation and tax. To take the highest of these three rates, the billion dollar pain at a 4% discount rate is going to feel to the average citizen, who faces the bill in 50 years, not like $1 million, but like $100 million. And for some societal purposes, 4% real is far too high. Surely, for example, shouldn’t the value, and hence cost, of a child’s life in 50 years be identical to the value and cost today? The reader can easily see how a corporation’s outlook on potential future damage might be a painful mismatch with that of ordinary individuals and society at large. The consequences of this not only can be disastrous but probably will be. A few painstaking readers might remember my “Farmer and The Devil” story of last July. In it I showed how a good capitalist farmer had to sign a contract in which the Devil guaranteed a quadrupling of the farmer’s income through very aggressive farming practices at the hidden cost of 1% a year of his soil. The farmer would enormously profit and eagerly re-up through the first several 20-year contracts only to end up with no soil, no food, and no people at about 100 years out. Yet each time the farmer re-upped, he did the sensible capitalist thing. In this case, Adam Smith’s “invisible hand” failed, and fatally so.

Damage to the “commons,” known as “externalities” has been discussed for decades, although the most threatening one – loss of our collective ability to feed ourselves, through erosion and fertilizer depletion – has received little or no attention. There have been no useful tricks proposed, however, for how we will collectively impose sensible, survivable, long-term policies over problems of the “commons.” To leave it to capitalism to get us out of this fix by maximizing its short-term profits is dangerously naïve and misses the point: capitalism and corporations have absolutely no mechanism for dealing with these problems, and seen through a corporate discount rate lens, our grandchildren really do have no value.

To move from the problem of long time horizons to the short-term common good, it is quickly apparent that capitalism in general has no sense of ethics or conscience. Whatever the Supreme Court may think, it is not a person. Why would a company give up a penny for the common good if it is not required to by enforced regulation or unless it looked like that penny might be returned with profit in the future because having a good image might be good for business? Ethical CEOs can drag a company along for a while, but this is an undependable and temporary fix. Ethical humans can also impose their will on corporations singly or en masse by withholding purchases or bestowing them, and companies can anticipate this and even influence it through clever brand advertising, “clean coal” being my favorite. But that is quite different from corporate altruism. Thus, we can roast our planet and firms may offer marvelous and profitable energy-saving equipment, but it will be for profit today, not planet saving tomorrow.

It gets worse, for what capitalism has always had is money with which to try to buy influence. Today’s version of U.S. capitalism has died and gone to heaven on this issue. A company is now free to spend money to influence political outcomes and need tell no one, least of all its own shareholders, the technical owners. So, rich industries can exert so much political influence that they now have a dangerous degree of influence over Congress. And the issues they most influence are precisely the ones that matter most, the ones that are most important to society’s long-term well-being, indeed its very existence. Thus, taking huge benefits from Nature and damaging it in return is completely free and all attempts at government control are fought with costly lobbying and advertising. And one of the first victims in this campaign has been the truth. If scientific evidence suggests costs and limits be imposed on industry to protect the long-term environment, then science will be opposed by clever disinformation. It’s now getting to be an old and obvious story, but because their propaganda is good and despite the solidness of the data, half of the people believe the problem is a government run wild, mad to control everything. So the “industrial complex” (or parts of it) fights to increase the inherent weaknesses of capitalism. They deliberately make it ever harder to reach the very long-term decisions that will serve us all. The influence of the Tobacco companies in deliberately obscuring the science to protect profits at a huge cost to society in health costs and lives is a perfect analogy to the energy industries that work hard to confuse the public on scientific measures of damage to health and the environment. Yet it is one that is surprisingly forgotten.

Of all the technical weaknesses in capitalism, though, probably the most immediately dangerous is its absolute inability to process the finiteness of resources and the mathematical impossibility of maintaining rapid growth in physical output. You can have steady increases in the quality of goods and services and, I hope, the quality of life, but you can’t have sustainable growth in physical output. You can have “growth” – for now – or you can have “sustainable” forever, but not both. This is a message brought to you by the laws of compound interest and the laws of nature. However, you can try to have both. But many, when given the choice, select “Growth, and to hell with the consequences.” Alternatively they adopt a hear-no-evil approach to life and listen exclusively to good news. The good news for such people is that there are always a few experts lacking in long-horizon vision, simple common sense, or whose co-operation has been rented, like “expert” witnesses at a murder trial, who can be dragged out to reliably say that everything will always work out fine. (One famous professor went seamlessly from saying tobacco smoking was just fine to saying continuously pumping out greenhouse gases would also be without consequences). The optimists offer as evidence that we will always be in the best of all possible worlds, not our species’ tough million or so years of trial and painful error, but only the last 200 years, when hydrocarbon and other resources have given us a temporary reprieve. This reprieve does not make the finite magically infinite, but the 250 years of the hydrocarbon intermission can feel like forever. Capitalism certainly acts as if it believes that rapid growth in physical wealth can go on forever. It appears to be hooked on high growth and avoids any suggestion that it might be slowed down by limits. Thus, it exhibits horror at the thought (and occasional reality) of declining population when in fact such a decline is an absolute necessity in order for us to end up gracefully, rather than painfully, at a fully sustainable world economy. Similarly with natural resources, capitalism wants to eat into these precious, limited resources at an accelerating rate with the subtext that everyone on the planet has the right to live like the wasteful polluting developed countries do today. You don’t have to be a PhD mathematician to work out that if the average Chinese and Indian were to catch up with (the theoretically moving target of) the average American, then our planet’s goose is cooked, along with most other things. Indeed, scientists calculate that if they caught up, we would need at least three planets to be fully sustainable. But few listen to scientists these days. So, do you know how many economic theories treat resources as if they are finite? Well, the researchers at the O.E.C.D say “none” – that no such theory exists. Economic theory either ignores this little problem or assumes you reach out and take the needed resources given the normal workings of supply and demand and you can do it indefinitely. This is a lack of common sense on a par with “rational expectations,” that elegant theory that encouraged the ludicrous faith in deregulation and the wisdom of free markets, which brought us our recent financial fiascos. But this failure in economic theory – ignoring natural limits – risks far more dangerous outcomes than temporary financial crashes.

Let me pose a simple question. If there were an extra thousand years of oil supply – of onshore traditional oil – available at, say, a production cost of $200 a barrel in addition to the actual 40 years of mixed-cost reserves that we have today, what difference would it make in today’s price? Remarkably, the answer is “none.” Today’s price is concerned only with the intermediate-term workings of current costs of current barrels and current demand. Yet every rational reader knows that this should not be the case: that the existence of huge reserves (or the lack thereof) should indeed influence today’s price in a world concerned about its very long-term well-being. In addition to ignoring the depleting supplies of high quality materials, no concern at all is shown for our current devastatingly erosive and resource-intensive global farming practices.

As described above, the current U.S. capitalist system appears to contain some potentially fatal flaws. Therefore, we should ask what it would take for our system to evolve in time to save our bacon. Clearly, a better balance with regulations would be a help. This requires reasonably enlightened regulations, which are unlikely to be produced until big money’s influence in Congress, and particularly in elections, decreases. This would necessitate legal changes all the way up to the Supreme Court. It’s a long haul, but a handful of other democratic countries in northern Europe have been successful, and with the stakes so high we have little alternative but to change our ways.

It would certainly help if the general public were better educated, especially in science. The same applies, unfortunately, to Congress itself. This body is desperately short of scientists and basic familiarity with things scientific. Our key problems need to be addressed by people very familiar and comfortable with science. It is said that eight of the nine senior leaders in China’s government are scientists. At that high a level, of our 535 Congressmen and the President and Vice President, less than a handful – arguably only two or three – would pass the test. (I suppose you could throw in the Supreme Court Justices if you wanted to.) It is said, on the other hand, that about 100 Congressmen do not believe in evolution. Without a respect for science in Congress and with science in the general public declining as an interest, some of the painful new issues are going to be hard to address. (The percentage of students graduating with degrees in science as a proportion of total U.S. graduates is the 60th highest by country these days!) This lack of scientific familiarity is made worse by the fact that everyone loves to hear good news, Americans more than most.

The tough news we must sooner or later grasp is made tougher by the skilled, energetic denials, well-funded by powerful industries that fear their profits would be threatened. Libertarians seem to feel that even if the bad news were true, the necessary regulations would be so distasteful that they would really prefer that the science were different, and they deem it so, putting desired political theory over science.

Meanwhile, China gets on with it and science is accepted in what used to be our normal way until the last decade or two. And I suppose they have some unfair advantages, among them leaders with scientific backgrounds and higher science scores for the general public, but they also have the luxury of a leadership that does not face election campaigns. Lucky them. The critical consequences are that they waste no time in challenging climate problems (the same is true of India) and, even more importantly perhaps, they begin to really worry, almost panic, about their long-term access to crucial resources. In contrast to our political log jam and failure to face long-term issues, they have moved rapidly to exploit new sustainable energy sources, to tie down resource deals, and to promote improved resource efficiency.

The U.S. and Canada are blessed with natural advantages that are unrivaled (at least if you include security, which, in a desperate, resource-constrained, warming world might hurt New Zealand, that otherwise would look hard to beat). Yet the relatively uncontrolled variety of capitalism that exists in the U.S. today may negate many of our advantages. Solutions to these issues – far more important than any others – need a delicate mix of capitalism and wise, democratically-controlled government regulation. That might sound like an oxymoron to far too many people. If we can’t make it sound, plausible, and acceptable in the next few decades, then we are in deep trouble for the world really, really needs U.S. leadership on these critical issues.

Karl Marx went on and on about the tendency of capitalism to so fixate on growth that in time it would forget the need to put on a friendly face for society and would drive home too clearly and brutally its advantage over labor. Ironically, in some way he and Engels looked forward to globalization and the supranational company because they argued it would make capitalism even more powerful, over reaching, and eventually reckless. It would, they claimed, offer the capitalists more rope to hang themselves with or, rather, to be hung with, in the workers’ revolution. The rope for the job, they suggested with black humor, would be bought from briskly competing capitalists, eager till the end for a good deal. Well, time marches on and it’s going to be hard to have a workers’ revolution with no workers. Organizing robotic machine tools will not be easy. However, Marx and Engels certainly got the part right about globalization and the supranational company increasing the power of capital at the expense of labor. To interfere with Marx’s apocalyptic vision, we need some enlightened governmental moderation of the new globalized Juggernaut (even slightly enlightened would be encouraging) before capitalism gets so cocky that we have some serious social reaction.

But for me capitalism’s complete fixation on growth at all cost that Marx concentrated on is not as important as the other issues discussed here. Capitalism, by ignoring the finite nature of resources and by neglecting the long-term well-being of the planet and its potentially crucial biodiversity, threatens our existence. Fifty and one-hundred-year horizons are important despite the “tyranny of the discount rate,” and grandchildren do have value. My conclusion is that capitalism does admittedly do a thousand things better than other systems: it only currently fails in two or three. Unfortunately for us all, even a single one of these failings may bring capitalism down and us with it.

After noting that just two dozen or so individuals, couples and companies have given more than 80 percent of the money collected by SuperPACs, the New York Times delves into the backgound of three of the biggest contributors:

¶Harold Simmons, a billionaire corporate raider, has given $1 million to Mr. Gingrich’s political action committee, $1.1 million to Rick Perry’s PAC, $100,000 to Mitt Romney’s PAC, and $10 million to American Crossroads, the super PAC advised by Karl Rove that is supporting many Republican candidates. Mr. Simmons’s companies make metals, paints and chemicals, among other things, and have gotten into trouble over lead and uranium emissions from previous decades. He also runs a radioactive waste dump in Texas that has clashed with environmental regulators over its proximity to a nearby aquifer. He controls Waste Control Specialists, which has contracts to clean up federal hazardous waste sites, including emissions from other companies he controls.

¶Peter Thiel, a co-founder of PayPal and an outspoken libertarian, gave $2.6 million to Ron Paul’s PAC. In 2009, he wrote that the 1920s were the last decade when one could be optimistic about American politics, lamenting the subsequent rise of the welfare state that he blamed in part on giving women the right to vote.

¶Foster Friess, who gave $1 million to Rick Santorum’s Red White and Blue PAC, is a mutual fund manager who recently declared that aspirin used to be an effective contraceptive when women put it between their knees. He is a former president of the Council for National Policy, a secretive club of some of the country’s most powerful conservatives, which opposes unions, same-sex marriage and government regulation.

Raghuram Rajan expands on this conclusion:

On a recent visit to Europe, I found economists, journalists, and business people thoroughly frustrated with their politicians. Why, they ask, can’t politicians see the abyss that yawns before them, and come together to resolve the euro crisis once and for all?

Even if there is no consensus on what a solution might be, can’t they meet and thrash out a plan that goes beyond their repeated half-measures? It is only because of the European Central Bank’s bold decision to lend long term to banks that we have seen some respite recently, or so their argument goes. Politicians, in contrast, are failing Europe by being forever behind the curve. Why do they find it so hard to lead?

One answer that can be easily dismissed is that politicians simply don’t understand the gravity of the situation. Political leaders need not be economic geniuses to understand the advice that they hear, and many are both intelligent and well-read.

A second answer – that politicians have short time horizons, owing to electoral cycles – may contain a kernel of truth, but it is inadequate, because the adverse consequences of timid action often become apparent well before they are up for re-election.

The best answer that I have heard comes from Axel Weber, the former president of Germany’s Bundesbank and an astute political observer. In Weber’s view, policymakers simply do not have the public mandate to get ahead of problems, especially novel ones that seem small initially, but, if unresolved, imply potentially large costs.

If the problem has not been experienced before, the public is not convinced of the potential costs of inaction. And, if action prevents the problem, the public never experiences the averted calamity, and voters therefore penalize political leaders for the immediate costs that the action entails. Even if politicians have perfect foresight of the disaster that awaits if nothing is done, they may have little ability to persuade voters, or less insightful party members, that the short-term costs must be paid.

Talk is cheap, and, in the absence of evidence to the contrary, the status quo usually appears comfortable enough. So leaders’ ability to take corrective action increases only with time, as some of the costs of inaction are experienced.

Calamity can still be averted if the costs of inaction escalate steadily. The worst problems, however, are those with “inaction costs” that remain invisible for a long time, but increase suddenly and explosively. By the time the leader has the mandate to act, it may be too late.

[This is the example that always comes to my mind, too]

A classic example was Winston Churchill’s warnings against Adolf Hitler’s ambitions. Hitler’s plans were outlined in Mein Kampf for all to read – and he did not disguise them in his speeches. Yet few in Britain wanted to give them credence, and many thought that communism was the greater threat, especially in the bleak years of the Great Depression. The Nazis’ dismembering of Czechoslovakia in 1938 made the sincerity of Hitler’s ambitions all too clear. But it was only after the invasion of Poland the following year that Churchill was appointed First Lord of the Admiralty, and he became Prime Minister only after the invasion of France in 1940, when Britain stood alone. Britain might well have been better off had Churchill held power earlier, but that would have meant costly rearmament, which was unacceptable so long as there was a chance that Hitler proved to be a paper tiger. And, of course, it would also have meant entrusting Britain’s fate to a politician who, though now regarded as an indomitable leader, was widely distrusted at the time.

Non-linear costs of inaction are most obvious in the financial sector. At the same time, financial-sector problems may be particularly difficult to address: if politicians emphasize the need for action too strongly in order to get a mandate, they might precipitate the very turmoil that they seek to contain.

Between the Bear Stearns crisis and the failure of Lehman Brothers, the United States government could do little to get ahead of the growing problem (though, of course, the government-backed mortgage underwriters Fannie Mae and Freddie Mac were placed under conservatorship in the interim). It took the post-Lehman panic for Congress to authorize the Troubled Asset Relief Program, which threw a financial lifeline to banks and the auto industry, among others. And only frenetic action by the Federal Reserve and Treasury (with authorities around the world joining) prevented a systemic meltdown. A subprime-mortgage problem that was initially estimated to imply losses of a few hundred billion dollars imposed far higher costs on the entire world.

Similarly, eurozone politicians have obtained a mandate to take bolder action only as the markets have made the costs of inaction more salient. Even setting aside Germany’s understandable attempt to limit how much it would have to pay, it is difficult to see how politicians could have gotten ahead of the problem.

While the ECB has bought the eurozone some time, the calming effect on markets may be a mixed blessing. Have Europeans seen enough of the abyss to tolerate stronger action by their leaders? If not, markets might have to deteriorate further to make possible a comprehensive resolution to the eurozone crisis.

Similarly, with government bond yields as low as they are in the US, the public has little sense of urgency about its fiscal problems, though some doomsayers, like Peter Peterson of the Blackstone Group, have been trying their best to awaken it. One hopes that the coming US presidential election will lead to a more enlightened public debate about tax and entitlement reform. Otherwise, a rapid escalation of yields in the bond market might be necessary for the public to accept that there is a problem, and for politicians to have the room to resolve it.

Don’t blame the leaders for appearing short-sighted and indecisive; the fault may lie with us, the public, for not listening to the worrywarts.

Raghuram Rajan is Professor of Finance at the Booth School of Business, University of Chicago, and the author of Fault Lines: How Hidden Fractures Still Threaten the World Economy.

No kidding — he actually said this while campaigning in Colorado.

He also said science has been hijacked by politicians on the left, and that climate change is

“an absolute travesty of scientific research that was motivated by those who, in my opinion, saw this as an opportunity to create a panic and a crisis for government to be able to step in and even more greatly control your life. I for one never bought the hoax. I for one understand just from science that there are one hundred factors that influence the climate. To suggest that one minor factor of which man’s contribution is a minor factor in the minor factor is the determining ingredient in the sauce that affects the entire global warming and cooling is just absurd on its face. And yet we have politicians running to the ramparts — unfortunately politicians who happen to be running for the Republican nomination for president — who bought into man-made global warming and bought into cap and trade.”

While Santorum isn’t alone in asserting that human activity has next to nothing to do with climate change, his analysis of why the housing bubble burst is, as far as I know, unique. As I can’t think of any political reason for him to make this assertion, I conclude that this is what he actually believes. Should he become president, his economic policies would, therefore, likely be — how shall I put it? — unique.

Just in case, make sure your passport won’t expire before election day. It would be better to live in a country whose head of state doesn’t reside in an economic fantasyland (apologies to Disneyland).

The above is the concluding sentence of a New York Times editorial criticizing Mr. Obama for deciding to take super-PAC money. In an ideal world, of course, there wouldn’t be any of these Supreme Court-created monsters threatening our democracy. But that’s not the world we live in.

Here’s the rest of the editorial:

Two years ago, while delivering his State of the Union address, President Obama looked the Supreme Court justices in the face and told them they were wrong to have allowed special interests to spend without limits on campaigns. “I don’t think American elections should be bankrolled by America’s most powerful interests,” he said. “They should be decided by the American people.”

On Monday, the president abandoned that fundamental principle and gave in to the culture of the Citizens United decision that he once denounced as a “threat to our democracy.”

His aides announced that the Obama campaign would begin to assist the “super PAC” that can raise and spend unlimited sums to support the president’s re-election effort. Even White House and cabinet officials are expected to appear at fund-raising events for Priorities USA Action.

The announcement fully implicates the president, his campaign and his administration in the pollution of the political system unleashed by Citizens United and related court decisions. Corporations, unions and wealthy individuals are already writing huge checks — with no restrictions — to political action committees supporting individual candidates, which have become bag men for campaigns that still nominally operate under federal limits.

As misguided as it was, the Citizens United decision naïvely believed that the super PACs would remain separate from individual campaigns. The White House’s decision to allow insiders like Kathleen Sebelius, the health and human services secretary, and Jim Messina, the Obama campaign manager, to speak at Priorities USA Action events shows how ludicrous that notion has become, raising questions about whether the law is being violated.

Up to now, Republicans have been the main defenders of this corrupt system, and the main beneficiaries of it. Two of Karl Rove’s political groups raised $51 million last year to use against Mr. Obama and other Democrats, and the Republican presidential candidates’ PACs have raised $40 million.

Priorities USA Action and other Democratic groups have raised only $19 million. And, as Mr. Messina wrote on the Obama campaign’s blog, “with so much at stake” Democrats decided that they would not “unilaterally disarm.”

But if President Obama had refused to join in this downward spiral — and if he had proudly campaigned on that refusal — he and his campaign might have made up for that deficit in other ways: with more small contributions, and more support, from a public disgusted by the outsize influence of big money.

A president has a megaphone bigger even than Mr. Rove’s bloated bank account, and Mr. Obama could have impressed many wavering voters if he had chosen to use it against campaign corruption. He could have pointed out that it was Republicans who blocked the Disclose Act, which would have ended secret corporate donations, and that it was Republicans who used unlimited corporate funds to win back the House in 2010, pressing a corporate agenda that has severely hurt the middle class.

He could have ridiculed Mitt Romney’s super PAC for accepting $18 million from just 200 donors in the second half of last year, including million-dollar checks from hedge-fund operators, industrialists and bankers.

But now Mr. Obama has given up that higher ground. He had already undermined the public financing system for presidential campaigns by refusing to use it in 2008, but this is much worse. In that campaign, he at least forswore money from independent groups and lobbyists. Now he is relying on a super PAC that can accept money from anyone.

After such a long wait for healthy job growth, only a curmudgeon would deny the good news.

The Journal editorial asserts that the “the economy’s natural recuperative powers” and the “the gridlock that arrived a year ago with the Republican House” are responsible for the improvement in the labor market:

Why the better news now? One likely reason is that the U.S. economy is so large and dynamic that left to its own devices it is bound to expand. After such a long trough, the economy’s natural recuperative powers are taking hold.

Washington has also stilled some of its damaging impulses, at least temporarily, thanks to the gridlock that arrived a year ago with the Republican House. Regulators are still doing damage, but less than they would have without new political scrutiny, and Congress has stopped spending more and ceased doing active harm.

In a nutshell, the most powerful voice of American conservatism is saying that the economy is improving in spite of and not because of the Obama Administration’s economic policies and programs.

Talking about role reversal! No longer does Obama have to persuade the people that, had it not been for his policies and programs, the economic recovery would have been even more anemic. Now, his Republican opponent — presumably Romney — has to convince the people that, in the absence of these policies and programs, the economic recovery would have been more robust.

The shoe is on the other foot. The tall order is now faced by the Republicans, not the Democrats. The likelihood of a second term for Mr. Obama has risen. So has the likelihood that the Democrats will retain control of the Senate. Finally, the possibility that the Democrats will regain control of the House is no longer remote.

The eurozone should gradually climb out of its mild recession in the second half of this year and into 2013, in Standard & Poor’s opinion. We think core countries will lead the way, with other member countries delivering diverging performances. Under our baseline forecast for 2012-2013, which we updated at the end of 2011, we project flat GDP for the eurozone as a whole in 2012 and 1% growth in 2013.

We acknowledge, however, that risks of a steeper downturn this year have risen. We currently assign a 60% probability to our baseline forecast, versus 40% for our alternative forecast of a true double dip, which would have a particularly adverse impact in countries like Spain, Portugal, and Italy. We believe three main factors will determine the depth of the eurozone’s downturn:

• How demand from emerging markets holds up in the coming quarters;
• How European consumers react to renewed uncertainties, such as rising unemployment and concerns about the sovereign debt crisis; and
• How European governments and especially the European Central Bank (ECB) rekindle investor confidence in capital markets in the next few quarters.

Still, we think the scale continues to tilt in favor of a mild recession and a gradual return to growth, taking into account potential growth in emerging market demand, resilient consumer demand in the core countries, and somewhat restored investor confidence.

With the exceptions of  two Republicans – Tom Coburn (Okla.) and Richard Burr (N.C.) – and one Democrat — Jeff Bingaman (N.M.) — the Senate passed the STOCK Act.

The STOCK Act calls for members of Congress to report stock and other financial transactions within 30 days and require that these filings be available online. It also requires members of Congress, their staff and about 2,000 top policymakers in the executive branch to publicly disclose the terms of home mortgages. And an amendment by Senator Richard Shelby (R-Ala.) was adopted requiring securities trades and financial disclosure statements for about 3,000 executive branch employees to be published online.

US corporate profits have grown at an 8% annualized rate over the past two decades.This has pushed profit margins to all-time highs using both S&P 500 and national income and product account (NIPA) data . . . Basic economic intuition suggests that high profit margins should eventually mean-revert, as excess returns are competed away via higher investment or a swing back in the income distribution from capital to labor. But while this may be the right long-term story, the forces of mean-reversion still look weak over the next couple of years, and a modest further NIPA margin expansion seems more likely.