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Wednesday, February 15, 2012

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Economic Events of the Week

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

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e21 Reaction & Commentary
e21 Commentary: How Not to Make Public Policy: The Payroll Tax Cut

Washington Update
Congressional Negotiators Reach Tentative Deal on Payroll Tax (Washington Post)
Obama Predicts He Will Breach Debt Ceiling Two Months Before Election (Zero Hedge)

Market Talk
Fed’s Plosser Opposes Rate Timetable (Real Time Economics)
A Darkening Mood (The Economist)
Why Latinos Have Been First to Make It Back to Pre-Recession Employment (The Atlantic)

Editorials & Opinions
US Auto Bailout Was ‘Crony Capitalism on a Grand Scale’ (Mitt Romney in Detroit News)
Tax Increases, Debt Limit Loom Over Budget Debate (Peter Orszag in Bloomberg)
How to Crank Up America’s Economic Dynamo (Glenn Hubbard in Financial Times)
Spending Won’t Fix What Ailes US Infrastructure (Edward Glaeser in Bloomberg)

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e21 Reaction & Commentary

e21 Commentary: How Not to Make Public Policy: The Payroll Tax Cut

It is rare that an act of legislation encompasses nearly every feature of poor public policy making in the manner of the current “temporary” Social Security payroll tax cut. Imperfect legislation is of course the norm in any system that brokers compromises between competing interests, but more typically even the worst outcomes advance the general policy objectives of one side even as they may be fiercely condemned by the other. The payroll tax cut, by contrast, serves almost no productive purpose while causing severe adverse consequences from almost any conceivable policy vantage point. The political dynamic surrounding the payroll tax cut has now evolved in such a way that neither party wants to be blamed for its expiration, so it will likely be extended even though it has now become almost a perfect storm of policy mistakes. Its ultra-temporary nature undoes virtually all of the positive stimulus impact claimed for it, while the adverse effects include high policy uncertainty, undercutting budget transparency, increased fiscal pressure, and lasting damage to Social Security’s financial and political foundation, this last of which may well prove irreparable.


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Washington Update

Congressional Negotiators Reach Tentative Deal on Payroll Tax (Washington Post)

Congressional negotiators reached a tentative deal Tuesday to extend a payroll tax holiday, unemployment benefits and Medicare payment rates for doctors, while finding more than $50 billion in cuts to reduce the effect on the federal deficit. While President Obama and congressional leaders publicly jousted over the negotiations, senior Democrat and Republicans worked behind the scenes toward a compromise that would extend the tax and unemployment benefits through the year. A deal also would mean that doctors would not see a drop in rates paid by Medicare, according to senior aides in both parties. Lawmakers and aides stressed that final details are still being ironed out — including which cuts would be used to finance the unemployment and Medicare provision — but they were optimistic that a broad deal would be announced Wednesday and approved by Friday.

Obama Predicts He Will Breach Debt Ceiling Two Months Before Election (Zero Hedge)

In light of the epic fiasco from last August, when the US debt ceiling hike became a 2 month televized affair, culminating with the GOP caving, but not before the S&P downgraded the US (and in the process breaking the US stock market), Zero Hedge has long been analyzing the chronology of future debt breaches, as with the presidential election in November, what happens in the months and weeks ahead of it as pertains to the number one problem facing America - its lethal debt addiction - will be by far the biggest weakness of Obama's campaign. With two months ahead of the election, the US will have a de minimis $60 billion in debt capacity. And since the implied burn rate is $133 billion/month this means that the United States will be in full blown debt ceiling hike chaos just as the final electoral debates take place. And one wonders why the GOP rushed to green light Obama an additional $160 billion in debt issuance. If indeed the $160 billion in new debt is added, the US may not even last to September before Tim Geithner is forced to start plundering G-fund and other retirement accounts. It also means that two months of America in a debt ceiling breach situation will deal a dramatic blow to Obama's reelection chances as the last thing the US population will want is a replay of last summer.


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Market Talk

Fed’s Plosser Opposes Rate Timetable (Real Time Economics)

The U.S. Federal Reserve shouldn’t have conditionally pledged to keep interest rates low until 2014 because the economy is improving, a central banker said Tuesday. “I do not support the practice of offering forward policy guidance by saying economic conditions are likely to lead to low rates through some calendar date,” said Federal Reserve Bank of Philadelphia President Charles Plosser, speaking at the University of Delaware Center for Economic Education and Entrepreneurship. “Monetary policy should be contingent on the economic environment and not the calendar.” Plosser said he wasn’t supportive of the Federal Open Market Committee‘s announcement in January because economic conditions “do not call for further accommodation.” The FOMC had previously said rates would likely stay low until at least the middle of 2013.

A Darkening Mood (The Economist)

The judgment of the big credit rating agencies may not carry quite the thunderous resonance it used to, but the steady drumbeat of rich sovereign downgrades nonetheless provides an unpleasant crisis rhythm. On Tuesday, Moody's became the latest agency to revise downward its view of the solidity of European sovereigns. The ratings firm passed out a handful of downgrades—to Italy, Malta, Portugal, Slovakia, Slovenia, and Spain—which, while unfortunate, left those countries still hanging on to "investment grade" ratings (all but Portugal) out of "speculative" territory. Moody's left the outlook on those sovereigns negative, suggesting a 30% chance of another downgrade in the next 18 months.

Why Latinos Have Been First to Make It Back to Pre-Recession Employment (The Atlantic)

Although Latinos make up only a seventh of the population, they have "racked up half the employment gains posted since the economy began adding jobs in early 2010", the Los Angeles Times reported this morning. In 2011, the trend accelerated. Of the 2.3 million jobs added in 2011 according to the Household Survey of the Bureau of Labor Statistics, 1.4 million, or 60 percent, were won by Latinos. This remarkable statistic is a keyhole into America's two-speed recovery. One true story of the recession is that employment gains have been biased toward the highly educated. More than half of the jobs added in 2011 went to Americans with a college education. Another true story of the recession is that most of the other jobs have been low-paid and went to the less-educated. Educational attainment among Hispanics remains very low. Just 10% of foreign-born and 13.5% of native Latinos have finished college, placing the group's completion rate at about a third of the national average. So how did Latinos become the first demographic group whose employment numbers returned to pre-recession levels?


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Editorials & Opinions

US Auto Bailout Was ‘Crony Capitalism on a Grand Scale’ (Mitt Romney in Detroit News)

I am a son of Detroit. I was born in Harper Hospital and lived in the city until my family moved to Oakland County. I grew up drinking Vernors and watching ballgames at Michigan & Trumbull. Cars got in my bones early. And not just any cars, American cars. When the president of American Motors died suddenly in 1954, my dad, George Romney, was asked to take his place. I was 7 and got my love of cars and chrome and fins and roaring motors from him. I grew up around the industry and watched it flourish. Years later, I watched with sadness as it floundered. Three years ago, in the midst of an economic crisis, a newly elected President Barack Obama stepped in with a bailout for the auto industry. The indisputable good news is that Chrysler and General Motors are still in business. The equally indisputable bad news is that all the defects in President Obama's management of the American economy are evident in what he did. Instead of doing the right thing and standing up to union bosses,Obama rewarded them.

Tax Increases, Debt Limit Loom Over Budget Debate (Peter Orszag in Bloomberg)

Most people understandably won’t make it to Table 6-2 of the Analytical Perspectives companion volume released with the Obama administration’s budget. This table, though, foreshadows the fight that will come at about this time next year -- and is thus one good way to view the budget as a whole. Table 6-2 shows that even with a somewhat sunny outlook for economic growth this year, the amount of government debt that is applicable to the debt limit is projected to reach, by the end of September, $16.3 trillion. The debt-limit itself currently stands at $16.4 trillion. So by next January, if not sooner, we will again be debating a debt-limit increase -- at the same time that significant spending reductions and tax-cut expirations are scheduled to take effect. The journey through this fiscal maze next year will make last summer’s debt-limit debate look like child’s play. In the meantime, we should keep five basic fiscal principles in mind.

How to Crank Up America’s Economic Dynamo (Glenn Hubbard in Financial Times)

Innovation is the ultimate driver of living standards and future jobs. It comes in two forms. First, “non-destructive creation” – the development of entirely new products and business models. Policies that support this include strong federal backing for basic research and financial sector regulation that considers incentives to lend as well as financial stability. Instead, the Dodd-Frank Act will limit the flow of credit to all but the largest and safest borrowers. “Creative destruction”, the other form of innovation, is also vital. It is important to recognise that net job creation is the difference between job creation and job destruction. In dynamic economies, both creation and destruction are high. In the 20 years before the financial crisis, annual job creation was 17 per cent of employment and annual job destruction was 15 per cent, according to John Haltiwanger of the University of Maryland. In order to foster creative destruction we need to make it easier to replace failing management and to reallocate labour and capital.

Spending Won’t Fix What Ailes US Infrastructure (Edward Glaeser in Bloomberg)

We should expect drivers to pay for more than just the physical costs of their travel. We should also expect them to pay for the congestion that they impose on other road users. If you have a scarce commodity, whether groceries or roads, and you insist on charging prices below market rates, the result will be long lines and stock outs, like those that bedeviled the Soviet Union decades ago. Yet U.S. roads are still running a Soviet-style transport policy, where we charge too little for valuable city streets. Traffic congestion is the urban equivalent of a stock out. The idea of congestion pricing was advanced by the economist William Vickrey 50 years ago. He wanted to charge enough so that streets would move fluidly. Singapore adopted the proposal in 1975, and it now has an electronic system that keeps the roads in the world’s second-densest country moving quickly. London is a more recent example of a congestion-pricing system, and that city has also become more livable as a result. Congestion pricing should have been allowed in Manhattan years ago, and it could help many U.S. cities.


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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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