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Tuesday, February 14, 2012

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Economic Events of the Week

Tuesday – Retail Sales
Wednesday – FOMC Minutes
Thursday – Housing Starts, Producer Price Index
Friday – Consumer Price Index

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e21 Reaction & Commentary
e21 Commentary: The President's Plan: Higher Taxes, Deep Defense Cuts, and the Entitlement Status Quo (James Capretta)

Washington Update
Obama Budget Would Double Bank Tax Size (Washington Post)
House GOP Reversed on Payroll Tax (Politico)

Market Talk
Volcker Rule Faces Harsh Critics  (Bloomberg)

Editorials & Opinions
The Ratio of Spending Cuts to Tax Increases in the President’s Budget (KeithHennessey.com)
Mortgage Settlement: One Step Forward, One Step Back (Christopher Papagianis in The Hill)
The Amazing Obama Budget (Wall Street Journal Editorial)
Obama’s Budget Fall Short, But It Beats Many Alternatives (Washington Post)
A Responsible Budget (New York Times)
Obama’s Budget Leaves Debt Bomb Ticking (USA Today)

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e21 Reaction & Commentary

e21 Commentary: The President's Plan: Higher Taxes, Deep Defense Cuts, and the Entitlement Status Quo (James Capretta)

In the budget President Obama proposed yesterday, he once again chose to placate constituencies and promote an activist government agenda at the expense of getting the nation’s fiscal house in order. The budget forecasts a $1.3 trillion deficit for the current fiscal year -- the fourth year in a row of trillion dollar deficits. The president is thus on track to pile up an astonishing $5.3 trillion in deficits during his first term, for fiscal years 2009 to 2012. For those who say he shouldn’t be held accountable for 2009 since he assumed office one-third of the way through it (and then promptly pushed through an $800 billion spending program), the cumulative deficit for the four year period 2010 to 2013 is nearly as bad -- $4.8 trillion.


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Washington Update

Obama Budget Would Double Bank Tax Size (Washington Post)

President Obama's budget plan calls for a bank tax twice as big as the one he proposed last year, a further sign he wants to make anti-Wall Street sentiment a major part of his re-election campaign. The bank tax, also known as the "Financial Crisis Responsibility Fee," first appeared in Obama's 2011 budget and was projected to raise $90 billion over 10 years. A year later, in the wake of the mid-term elections and accusations from executives that Obama was "anti-business," the White House cut the proposal by two-thirds to just $30 billion. In this year's budget, the bank tax is back up to $61 billion.

House GOP Reversed on Payroll Tax (Politico)

House Republicans have leapt at every chance to accuse President Barack Obama of piling up record debt and weakening shaky entitlement programs. But in a span of a few hours Monday afternoon, GOP leaders effectively stomped all over that message. At the same time Republicans were railing at Obama for proposing a budget with a $1.3 trillion deficit, House GOP leaders proposed something many in their party thought impossible: adding $100 billion to the deficit by passing a 10-month extension of a Social Security payroll tax cut without paying for it. The announcement shocked rank-and-file members, who were back in their House districts. Senate Republicans were likewise caught off guard — even one GOP leader who was trying to negotiate a compromise had no idea it was coming.


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Market Talk

Volcker Rule Faces Harsh Critics  (Bloomberg)

The world’s largest banks demanded a wish list of changes to a proposed U.S. ban on proprietary trading, seeking to escalate the lobbying effort against the Volcker rule five months before it takes effect. In scores of comment letters filed yesterday, bankers and their trade associations said the rule would increase risk, raise costs for investors, hurt U.S. competitiveness and be vulnerable to legal challenge. “Regardless of how the final rule turns out, it will be a shock to the U.S. financial system, as banking entities will need to take extraordinary measures to attempt to implement it,” Barry Zubrow, executive vice president of JPMorgan Chase & Co. said in a 67-page letter. Goldman Sachs Group Inc. (GS), Morgan Stanley and Bank of America Corp. were set to submit their letters to regulators by today.


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Editorials & Opinions

The Ratio of Spending Cuts to Tax Increases in the President’s Budget (KeithHennessey.com)

The Obama Administration claims their new budget contains $2.50 of spending cuts for every $1 of tax increases. Their 2.5:1 ratio is bogus. The President’s team is (1) playing a timeframe game and (2) counting interest savings from tax increases as spending cuts. The President is proposing at least $1.20 of tax increases for every dollar of proposed spending cuts. The President’s budget locks in historically high spending levels and relies more on tax increases than spending cuts for the limited deficit reduction it proposes. The short-term logic is, “Republicans got their spending cuts last year. Now it’s our turn to restore balance by relying mostly on tax increases to reduce future deficits.” The long-term goal is to lock in as high a level of government spending as possible and to rely principally on tax increases for deficit reduction.

Mortgage Settlement: One Step Forward, One Step Back (Christopher Papagianis in The Hill)

With great fanfare, the Obama administration and the state attorneys general recently announced the completion of what’s being touted as the largest consumer financial protection settlement in U.S. history. The country’s top mortgage servicers agreed to provide as much as $25 billion to help some past and current homeowners because banks regularly submitted foreclosure documents that were not properly reviewed or notarized (aka robo-signing).  At first blush, the settlement would appear to present an ideal opportunity for the market — paralyzed in part by the uncertainty over potential legal liabilities — to move ahead towards a much-needed housing recovery. In that regard, its completion was way overdue. In fact, by some accounts the statute of limitations on some of the abuses either had already or was about to run out.

The Amazing Obama Budget (Wall Street Journal Editorial)

Federal budgets are by definition political documents, but even by that standard yesterday's White House proposal for fiscal year 2013 is a brilliant bit of misdirection. With the abracadabra of a tax increase on the wealthy and defense spending cuts that will never materialize, the White House asserts that in President Obama's second term revenues will soar, outlays will fall, and $1.3 trillion annual deficits will be cut in half like the lady in the box on stage. All voters need to do is suspend disbelief for another nine months. And ignore the first four years. Four years of spending of more than 24% of GDP, the four highest spending years since 1946. In the current fiscal year of 2012, despite talk of austerity, Mr. Obama predicts spending will increase by $193 billion to $3.8 trillion, or 24.3% of GDP.

Obama’s Budget Fall Short, But It Beats Many Alternatives (Washington Post)

No budget can be judged in isolation. The baseline question is: compared to what? Republicans will make much of President Obama’s failure to fulfill his promise to cut the deficit in half by the end of his first term. Given the shaky recovery, he’s right to break that promise. The short-term goal must be economic growth, not deficit-trimming. Taming the ever-growing pile of debt is a longer-term challenge. On that goal, measured against his own fiscal commission, Mr. Obama’s proposed budget for fiscal year 2013 falls short. At the end of the 10-year budget window, he would have the national debt at a disturbing 76.5 percent of gross domestic product. By comparison, the debt reduction plan envisioned by the Simpson-Bowles commission would reduce the debt-to-GDP ratio close to a more manageable, if still unhealthy, 60 percent. To reduce debt, the first order of business must be Medicare.

A Responsible Budget (New York Times)

President Obama’s 2013 budget was greeted on Monday with Republican catcalls that it is simply a campaign document, but election-year budgets are supposed to explain priorities to voters. This one offers a clear and welcome contrast to the slashing austerity — and protect-the-wealthy priorities — favored by Republican Congressional leaders and the party’s presidential candidates. The president’s budget calls for long-term deficit reduction, but its immediate priority is to encourage the fledgling economic recovery. Instead of trying to stabilize the budget on the backs of the poor, it would raise taxes on the wealthy and on big banks and eliminate many corporate tax loopholes. To put Americans back to work, it would invest $350 billion in constructing roads, rail lines and schools, and encourage manufacturing through tax incentives and research spending.

Obama’s Budget Leaves Debt Bomb Ticking (USA Today)

It's tempting to give Obama a bit of a pass in this election year, considering that Republicans will reject anything he proposes and would use a plan big enough to get the debt under control as a club to beat him with. But this is the president's fourth year in office. If he had been aggressive about long-term debt in years one through three — and hadn't stiff-armed his deficit-reduction panel — the nation might not be where it is today. History shows that presidential leadership is an indispensable factor in any serious attempt to get the federal budget under control. Everyone serious in Washington knows that the key to defusing the debt bomb is a "grand bargain" that combines cuts in the big entitlement programs with tax increases, and not just on the rich. As long as Republicans remain intransigent on taxes and Democrats balk on entitlement reform, the deficits will keep piling up.


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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.

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