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Monday, March 5, 2012

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Economic Events of the Week

Monday – Factory Orders
Tuesday – Super Tuesday
Wednesday – Productivity
Thursday – Jobless Claims
Friday – Employment Situation

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Story of the Day
Debating Stimulus (John Taylor’s Blog)

Washington Update
Deficit Reduction Talks Live On (CQ)

Market Talk
If QE Hasn’t Worked, Why Do Central Banks Keep Doing It? (Morgan Stanley)
Signs the Economy is Turning Around (Washington Post)
AAA Shortage Drives International Holdings of Treasuries Up To $5 Trillion (Bloomberg)

Editorials & Opinions
Capital Gains, Ordinary Income, and Shades of Gray (Greg Mankiw in New York Times)
Jeremy Lin and the Political Economy of Superstars (Rogoff in Project Syndicate)
The Two Issues that Can Bring Down the Economy (Bruce Bartlett in Fiscal Times)
No More Win-Wins (Reihan Salam in The Daily)

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Story of the Day

Debating Stimulus (John Taylor’s Blog)

I have been doing a lot of empirical research on the impact of discretionary Keynesian stimulus packages—the temporary and targeted packages intended to counter recessions and jump-start the economy by increasing government purchases, transfer payments, or tax rebates. I don’t find convincing empirical evidence that they helped the economy, or that they increased economic growth in any significant or sustained way. In fact, by increasing unpredictability about policy and by raising uncertainty about increased deficits and debt, they are likely to have harmed the economy. Remarkably, economists found the same ineffectiveness when similar policies were tried and evaluated in the 1970s including a temporary tax rebate in the Ford Administration and stimulus grants to the states in the Carter administration. By the end of the terribly performing 1970s, Robert Lucas and Thomas Sargent wrote their famous paper “After Keynesian Macroeconomics” and macro policy switched away from the focus such temporary fiscal stimulus packages. Not surprisingly, in my view, economic performance improved greatly for more than two decades. It is too bad we had to go through the recent revival of these ineffective policies to relearn what was known thirty years ago.


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Washington Update

Deficit Reduction Talks Live On (CQ)

Two bipartisan groups of lawmakers are working behind the scenes to revive momentum for comprehensive legislation to address the government’s fiscal woes and in particular to chart a course for long-term deficit reduction. After the mostly abortive budget debates of the past year, which concluded with the Joint Select Committee on Deficit Reduction not reaching agreement, the subject moved to the background. But interest is again picking up. Republicans fiercely criticized the president’s fiscal 2013 budget proposal, released Feb. 13, for doing little to contain the rising federal debt. And Democrats continue to object that Republicans are too eager to reduce spending and too unwilling to raise taxes on the wealthy. Yet, despite all the politicking, in recent weeks lawmakers in both chambers have been working to put bipartisan, comprehensive deficit reduction plans into legislative form — a process that did not really happen last year.


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Market Talk

If QE Hasn’t Worked, Why Do Central Banks Keep Doing It? (Morgan Stanley)

First off, in our view QE has worked. What do we mean by "has worked"? QE, and monetary policy more generally, cannot deliver strong growth when the overhang of previous excesses still weighs on the economy. But it does support growth through supporting asset prices, increased inflation expectations and lower bond yields and spreads - and hence lower real interest rates (and weaker exchange rates). In addition, it satisfies the public's increased preference for safe and liquid assets (cash and central bank reserves). At the same time, it's probably true that there are diminishing returns to QE: the incremental easing achieved by each successive round declines, and so do the effects on the real economy. But to answer the question properly - to understand why central banks keep doing QE - it is important to put oneself in monetary authorities' shoes and perform the same cost-benefit calculations that they are doing.

Signs the Economy is Turning Around (Washington Post)

In case you haven’t noticed, the economy is actually getting better. Noticeably better. The data points for this optimism are to be found in recent reports on private payrolls (averaging just under 200,000 jobs per month for the past year), gross domestic product (growing at an annual rate of 3 percent), consumer confidence (as high as its been since 2008) and income (up 5 percent in the past year before adjusting for inflation). On Wall Street, the Dow is at its highest point in nearly four years and Nasdaq at its highest point in a decade, reflecting both record profits and renewed investor confidence.

AAA Shortage Drives International Holdings of Treasuries Up To $5 Trillion (Bloomberg)

For all the concern that the $10 trillion market for Treasuries is dependent on Federal Reserve purchases to absorb a continually expanding supply of debt, the amount held by investors outside the U.S. has grown even more. Foreigners increased their holdings of U.S. government debt by $1.84 trillion to a record $5 trillion since the Fed began the first round of Treasury purchases in May 2009, taking their stake to 60.5 percent of the securities not held by the central bank, government data show. The Fed added $1.18 trillion during that period, to $1.65 trillion, or 16.8 percent of the total, from 7.6 percent.


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Editorials & Opinions

Capital Gains, Ordinary Income, and Shades of Gray (Greg Mankiw in New York Times)

What  is carried interest? And why does it get the tax treatment it does? These arcane questions are usually reserved for the green-eyeshade crowd. And for good reason: they can be so bewildering that they seem to be taken from an I.Q. test written just for accountants. But because they concern a few very high-income individuals, including the presidential candidate Mitt Romney, for whom I am an adviser, they have been getting broader attention lately. So let’s examine the issue. Throughout almost the entire history of the United States income tax, the tax rate on capital gains has been lower than that on ordinary income. Today, the top rate is 15 percent for capital gains and 35 percent for ordinary income. There are good reasons for this — including, for example, the fact that capital gains are not indexed for inflation. But put that aside. If we are going to tax capital gains at a lower rate, one question necessarily arises: What is a capital gain, and how can we distinguish it from ordinary income?

Jeremy Lin and the Political Economy of Superstars (Rogoff in Project Syndicate)

I confess to being a huge Lin fan. Indeed, my teenage son has been idolizing Lin’s skills and work ethic ever since Lin starred on the Harvard team. But, as an economist observing the public’s seething anger over the “one percenters,” or individuals with exceptionally high incomes, I also see a different, overlooked facet of the story. What amazes me is the public’s blasé acceptance of the salaries of sports stars, compared to its low regard for superstars in business and finance. Half of all NBA players’ annual salaries exceed $2 million, more than five times the threshold for the top 1% of household incomes in the United States. Because long-time superstars like Kobe Bryant earn upwards of $25 million a year, the average annual NBA salary is more than $5 million. Indeed, Lin’s salary, at $800,000, is the NBA’s “minimum wage” for a second-season player. Presumably, Lin will soon be earning much more, and fans will applaud. Yet many of these same fans would almost surely argue that CEOs of Fortune 500 companies, whose median compensation is around $10 million, are ridiculously overpaid.

The Two Issues that Can Bring Down the Economy (Bruce Bartlett in Fiscal Times)

The term “crisis” is frequently overused in Washington, never more so than in budget debates. The problem is that a real crisis requires a hard deadline by which time something must happen or something terrible will happen. There are two hard deadlines approaching, the need to raise the debt limit and expiration of all expiring tax cuts at the end of the year. These two action-forcing events, when combined with more than the usual political uncertainty over control of Congress and the White House next year, mean that the long-awaited fiscal crisis is now here. Congressional Republicans and the Treasury both thought that the debt limit increase that had been agreed to was sufficient to get past the election. Now it appears that this may not be the case and it will be necessary to raise the debt limit before the election to avoid a default that would roil world financial markets to their core.

No More Win-Wins (Reihan Salam in The Daily)

The unfortunate truth is that all of the presidential contenders, including the incumbent president, are drastically underselling the kind of changes we’ll need to right the fiscal ship. It really is possible to deliver high-quality medical care for much less money. But this will most likely mean that physicians will see their wages go down as they become salaried employees of integrated medical providers, and as pharmacists, physician assistants and nurses take on more of their responsibilities. There is a way to provide an affordable college education. It’s just that the colleges and universities that succeed in doing so will have to be far more focused on teaching than research, which might make life less interesting and fulfilling for instructors. Curbing the mortgage interest deduction might actually help make housing more affordable by cooling off the bidding-up of homes in built-up areas. Of course, more affordable housing means that current homeowners will see the value of their most important investment go down.


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