Subscribe to List View Past IssuesRSS translate   facebook facebook Like 0 Comment 0Share twitter

 

dashed-line

Wednesday, February 8, 2012

dashed-line
Economic Events of the Week

Thursday – Jobless Claims
Friday – International Trade

dashed-line
e21 Reaction & Commentary
e21 Commentary: The U.S. and Europe: Governments of Equal Size?

Washington Update
Still No Deal on Payroll, and Clock is Ticking (Congress Daily)
Line Item Veto Bill Still Advancing in House (CQ)

Market Talk
Bernanke: Fed’s Policy’s Encouragement of Risk is By Design (Real Time Economics)
Government Spending: An Economic Boost (San Francisco Federal Reserve)
The Fed’s Next Hike Will Come in 2014 (Economist)

Editorials & Opinions
We Don’t Need Higher Taxes (Mitt Romney in USA Today)
Annoying Arguments about Fiscal Policy (Clive Crook in The Atlantic)
What Tax Reform Would Mean for the States (Howard Gleckman in TaxVox)

dashed-line

e21 Reaction & Commentary

e21 Commentary: The U.S. and Europe: Governments of Equal Size?

There is a sense among many commentators that the United States is “becoming” more like Europe in that the government is growing beyond thresholds that could be reasonably financed by the private sector. Putting aside the merits of this view, the general description of the U.S. as “moving towards” Europe makes the distance left to be traveled seem farther than it really is. The graphic below, constructed from the International Monetary Fund (IMF) World Economic Outlook (WEO) data, compares the combined government-to-GDP ratio of the 17 countries that use the euro currency to the combined government-to-GDP ratio of the U.S.


arrow Back to Top dashed-line

Washington Update

Still No Deal on Payroll, and Clock is Ticking (Congress Daily)

Negotiations to extend the payroll-tax cuts have devolved into warring messages, repeated arguments, and hardheadedness. In its fourth public meeting on Tuesday, the group tasked with finding solutions was permitted for the first time to address funding options to offset any policy provisions. Items up for discussion were limited to GOP proposals, including a pay freeze for federal workers and changes to Medicare payments for seniors. Republicans, including conference committee Chairman Dave Camp, R-Mich., insisted that each of the budget offsets were either proposed by President Obama or were included in legislation that had already passed the House. Those constraints enraged Democrats, including Sen. Jack Reed of Rhode Island, who accused Republicans of cherry-picking through larger proposals to avoid compromise.

Line Item Veto Bill Still Advancing in House (CQ)

Advocates of a targeted approach to spending restraint will probably chalk up a victory Wednesday when the House considers a bill that would give the president authority to delete individual items from spending legislation with Congress’ approval. Sponsored by House Budget Chairman Paul D. Ryan, R-Wis., and the panel’s ranking Democrat, Chris Van Hollen of Maryland, the line-item veto and rescissions bill is likely to win wide support from Republicans and Democrats. Yet, while fiscal hawks were anticipating success on the item-veto measure, they also experienced a setback Tuesday when it became clear that they could not offer a permanent restriction on earmarks as an amendment to an unrelated bill. The line-item veto bill is widely expected to pass in the House, even with some bipartisan opposition.


arrow Back to Top dashed-line

Market Talk

Bernanke: Fed’s Policy’s Encouragement of Risk is By Design (Real Time Economics)

Critics of the Federal Reserve‘s super easy money policy of recent years have long argued the tidal wave of liquidity will eventually generate a new round of bubbles that will bring fresh woe to the economy. Recently retired Kansas City Fed President Thomas Hoenig was in the forefront of such warnings during his final months at the central bank last year, going so far as to argue that surging farmland prices throughout the Midwest were tied to the central bank’s zero percent interest rates and bond-buying efforts. Many outside the Fed made the case the surge in commodity prices last year was the result of U.S. Fed policies. In response, Fed officials like Chairman Ben Bernanke and New York Fed President William Dudley have said that monetary policy actions of the sort the Fed is now pursuing represent a balancing of tradeoffs, and that in any case, with inflation low and unemployment high, the current path is the right one.

Government Spending: An Economic Boost (San Francisco Federal Reserve)

Over the past three years, there has been a resurgence in economic research on the impacts of fiscal policy, as implemented through direct government spending and tax rates. This resurgence is due in large part to the severe global economic downturn and the massive fiscal stimulus programs put in place in many countries as a response. Now, as many countries pivot from stimulus to austerity despite uncertain recovery, the question of the economic effects of higher taxes and reductions in government spending takes on a new importance. This Economic Letter reviews recent research on the economic effects of fiscal policy. This research makes clear that many factors can affect the size and direction of fiscal effects, suggesting that policymakers must carefully consider the specific context of fiscal policy to understand the probable effects of new spending and tax initiatives.

The Fed’s Next Hike Will Come in 2014 (Economist)

On January 25th, the Federal Open Market Committee decided to keep the federal funds rate at 0% to 0.25% and said that economic conditions are likely to warrant such low levels at least through late 2014. Many observers were surprised by such a long-term commitment to low rates. Interestingly, however, historical estimates of funds-rate reactions to FOMC members’ forecasts prescribe just such a response to the forecast published on January 25th. Historically, FOMC funds-rate decisions are closely matched by a simple rule of thumb that includes the mid-points of the inflation and unemployment forecasts reported by FOMC members. This finding was reported in an article in the Federal Reserve of St. Louis Review in 2008 by Athanasios Orphanides and Volker Wieland, but goes back to their earlier unpublished work with David Lindsey at the Federal Reserve in 1997.


arrow Back to Top dashed-line

Editorials & Opinions

We Don’t Need Higher Taxes (Mitt Romney in USA Today)

The president has allowed spending to explode on his watch, from a historical average of about 19% of GDP up to 25% of GDP. While no other president had ever run a $1 trillion deficit, he will run one every year of his administration. By the end of his first term, President Obama will have added nearly as much publicly held debt as all 43 prior presidents combined. When Republicans forced him to face facts last summer in negotiations over raising the debt ceiling, his response was to propose tax increases. But higher taxes are the last thing our struggling economy needs, and would only be an invitation to spend more. If we can restore our government to its pre-Obama size, existing tax revenues are roughly capable of funding it. In short, the government does not have a revenue problem; it has a spending problem.

Annoying Arguments about Fiscal Policy (Clive Crook in The Atlantic)

Advocates like myself of renewed fiscal stimulus for the US, Germany and some other EU countries have to answer a lot of weak arguments. One that especially riles Paul Krugman's cult-followers is the idea that balancing a nation's budget is exactly like balancing a household's budget. Well, they're right about that: it isn't, for the reasons Krugman tirelessly points out. One qualification: when a nation's budget deficit does have to be curbed, the prudent household story is not a bad political tool to use. Margaret Thatcher deployed it to good effect when it mattered. Meryl Streep has a little speech on the subject in The Iron Lady. My inner pragmatist says politicians shouldn't be too squeamish about using bad economics in a good economic cause.

What Tax Reform Would Mean for the States (Howard Gleckman in TaxVox)

What would fundamental changes in the federal tax code mean for state and local governments? Would it limit their ability to raise or borrow money? Would it make their revenue systems more or less progressive or even work more smoothly? The short answer is: A lot. Some change might be good, while other reforms might be quite disruptive. The bottom line seems to be that Congress could go a long way towards fixing the federal system without destroying state revenue codes—but only if reform is done carefully. Take, for example, the federal deduction for state and local taxes, which reduces federal revenues by more than $70 billion annually. Policymakers have been talking about repealing it at least since the Reagan Administration.


arrow Back to Top dashed-line

solid-line

e21: Economic Policies for the 21st Century is a nonprofit, nonpartisan organization dedicated to economic research and innovative public policies for the 21st century. Drawing on the expertise of practitioners, policymakers, and academics, we aim to advance free enterprise, fiscal discipline, economic growth, and the rule of law.

solid-line_1px

2011, e21: Economic Policies for the 21st Century


1150 17th Street, NW - Suite 504 - Washington, DC 20036
Phone: 202-232-0090 | Email: info@economics21.org

52 Vanderbilt Avenue - New York, New York 10017
Phone: 646-673-8539 | Email: info@economics21.org