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Wednesday, April 25, 2012

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Economic Events of the Week

Wednesday – Press Conference by Fed Chairman Bernanke, FOMC Meeting Announcement, Durable Goods Orders
Thursday – Jobless Claims
Friday – GDP

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Story of the Day
Fed Officials Weigh Rules-Based Policy That Stay Flexible (Bloomberg)

Washington Update
John Boehner: ‘We may never recover’ (Politico)
Business Community Bucks Student-Loan Pay-For (National Journal)
Allocations Set Up Spending Battle (CQ)

Market Talk
TARP: Billions in Loans in Doubt (The Wall Street Journal)
Philly Fed State Coincident Indexes increased in March (Calculated Risk)

Editorials & Opinions
Obama's Budget Means a Tax Increase on Everyone (Glenn Hubbard in The Wall Street Journal)
America’s Entitlement Spending Problem, Part 1 (KeithHennessey.com) 
A Payroll Tax Cut Could Help Social Security (Andrew Biggs in The Wall Street Journal)
Does Stimulus Grow the Private Economy? (Garett Jones in The Atlantic)

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Story of the Day

Fed Officials Weigh Rules-Based Policy That Stay Flexible (Bloomberg)

Federal Reserve officials are struggling to find consensus on a policy rule that’s predictable to investors yet flexible enough to adjust to shifts in the economy or markets. Vice Chairman Janet Yellen and Philadelphia Fed President Charles Plosser this month said rules like one created by Stanford University’s John B. Taylor may help central bankers avoid the impression that they are improvising. “Setting monetary policy in a systematic or rule-like manner leads to better economic outcomes,” Plosser said in an April 12 speech. Fed officials can’t afford to surprise investors and cause a market disruption that impedes growth or spurs inflation, said former St. Louis Fed President William Poole. At the same time, any policy rule risks tying the hands of Fed officials should the economy suddenly veer from their forecasts.


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Washington Update

John Boehner: ‘We may never recover’ (Politico)

House Speaker John Boehner said in a stark warning Tuesday that if President Barack Obama wins reelection, the American economy may “never recover.” “The president’s economic policies have failed – I would argue they actually made things worse. And as a result, the president has turned to the politics of envy and division. This is not in my opinion the right way to run for reelection,” Boehner said on Fox News. “America can’t live for four more years with Barack Obama as president. His policies will turn America in a direction that we may never recover from.” Boehner said in the TV interview that with Obama in the White House for four more years, the country will be sent “down a path that will look a lot like what we see in Europe: a big social welfare state, high unemployment, slow economic growth and a government that is overly large.”

Business Community Bucks Student-Loan Pay-For (National Journal)

Business groups are ready to fight being stuck with the bill for legislation to keep student-loan interest rates from doubling to 6.8 percent this summer, which has broad appeal and could quickly become law since both the White House and presumptive Republican presidential nominee Mitt Romney have endorsed it. Senate Health, Education, Labor, and Pensions Committee Chairman Tom Harkin, D-Iowa, said on Tuesday that Senate Democrats had reached a deal with the White House on legislation that would offset the cost of freezing student-loan interest rates for another year by subjecting so-called S corporations to payroll taxes. S corporations tend to be small, privately held companies in which earnings or losses can be passed through to shareholders, reducing federal payments. Closing such a loophole has been on the table for years but previous attempts have failed.

Allocations Set Up Spending Battle (CQ)

House and Senate appropriators are setting out in strikingly different directions on spending bills for the coming fiscal year, with the House allocating more to the Pentagon and less to the State Department and labor, health and education programs than the Senate. House Appropriations Chairman Harold Rogers, R-Ky., released the panel’s proposed allocations for the 12 appropriations bills for the fiscal year that begins Oct. 1, pegging them to the $1.028 trillion spending target set in the House-adopted budget. The Appropriations Committee is expected to approve the allocations, known as 302(b)s, on a party-line vote Wednesday, sending them to subcommittees for markups on program details and toward conflict with the Senate. Senate appropriators adopted their allocations last week in bipartisan votes that were aligned with the $1.047 trillion level set in the debt limit agreement last year between Congress and the White House.


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Market Talk

TARP: Billions in Loans in Doubt (The Wall Street Journal)

Hundreds of small banks can't afford to repay federal bailout loans, a top watchdog will warn Wednesday in a report that challenges the government's upbeat assessment of its financial-system rescue. Christy Romero, special inspector general for the Troubled Asset Relief Program, said 351 small banks with some $15 billion in outstanding TARP loans face a "significant challenge" in raising new funds to repay the government. Ms. Romero made the comments in her quarterly report to Congress, the first since the Senate approved her appointment in March as special inspector general for the program. She urged the government and regulators to find a way to help banks raise funds to repay the loans.

Philly Fed State Coincident Indexes increased in March (Calculated Risk)

The Federal Reserve Bank of Philadelphia has released the coincident indexes for the 50 states for March 2012. In the past month, the indexes increased in 48 states, decreased in one state (Rhode Island), and remained stable in one state (South Dakota), for a one-month diffusion index of 94. Over the past three months, the indexes increased in all 50 states, for a three-month diffusion index of 100. The coincident indexes combine four state-level indicators to summarize current economic conditions in a single statistic. The four state-level variables in each coincident index are nonfarm payroll employment, average hours worked in manufacturing, the unemployment rate, and wage and salary disbursements deflated by the consumer price index (U.S. city average). The trend for each state’s index is set to the trend of its gross domestic product (GDP), so long-term growth in the state’s index matches long-term growth in its GDP.


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Editorials & Opinions

Obama's Budget Means a Tax Increase on Everyone (Glenn Hubbard in The Wall Street Journal)

The defeat in the Senate of the so-called "Buffett Rule"—that targets millionaires for a tax increase—marks one more step in the election-year discussion about raising taxes on higher-income individuals to close the nation's yawning budget gap. Since 2008, a rising share of the economy—an estimated 24.3% of GDP in 2012, according to the Office of Management and Budget, up from 20.8% four years earlier—has been devoted to federal spending. The problem gets much worse. The Congressional Budget Office estimates that, absent changes in policy, the nation will spend 10 percentage points of GDP more on Social Security, Medicare, Medicaid and related programs in 2058 than it does today. President Obama's budget proposes to continue elevated levels of federal spending relative to GDP. So how does the president propose to pay for this?

America’s Entitlement Spending Problem, Part 1 (KeithHennessey.com)

I want to highlight two points from the Reports of the Social Security and Medicare Trustees, released Tuesday. Point 1:  If you do not change Social Security’s promised benefit payouts you would need to set aside $23.2 trillion today to permanently fill the hole between promised Social Security benefits and dedicated Social Security taxes (almost all of which are payroll taxes). For comparison $23.2 trillion is about one and a half years of U.S. GDP.  Take the entire economic output produced in the USA for the next 18 months.  Set it aside.  Now you have enough cash, when combined with future projected Social Security payroll and other dedicated taxes, to pay current and future benefit promises. That’s a mighty big hole to fill.

A Payroll Tax Cut Could Help Social Security (Andrew Biggs in The Wall Street Journal)

The annual Social Security Trustees Report, released on Monday, confirms that the program is significantly underfunded. After decades of delay, Congress and the next president will need to take steps to restore Social Security's finances and improve Americans' retirement income security. Although it might seem counterintuitive, one positive step toward achieving both goals is to cut the 12.4% payroll tax for workers nearing retirement, say, at age 62. The reason is that the current system encourages too many individuals to retire early, forgoing the extra savings they could have by extending their work lives. It is true that, in the aftermath of the Great Recession, more people are postponing retirement to rebuild their battered 401(k)s. Nevertheless, Americans on average still retire more than two years earlier than they did in 1960, despite less strenuous jobs and significantly longer life spans. The typical worker will spend one-third of his adult life in retirement, financed by entitlement programs that cannot bear the strain.

Does Stimulus Grow the Private Economy? (Garett Jones in The Atlantic)

Most of my research is on how intelligence--IQ--matters more for nations that it does for individuals. I've also done work on how monetary policy does or doesn't influence the economy, and on how we really didn't need to give unlimited bailouts to the big banks. I'll talk about a few of these topics in coming days, but let's start off by rehashing the battle over whether the 2009 stimulus bill--ARRA, the American Reinvestment and Recovery Act--really worked. I'm not talking about the tax cuts--I'm talking about the spending: green jobs, new government buildings, health clinic staffers. With my coauthor Dan Rothschild (now at AEI) I wrote two papers last year on the stimulus for the Mercatus Center at George Mason that got me thinking quite a lot about this. The Keynesian theory of stimulus is elegant: When a recession needlessly throws people out of work, the government can hire them, and then those people take their paychecks and buy stuff made in the private sector. So it's a win-win: The government and the private economy both expand. No cruel tradeoff: the pie is bigger than before, there's a "multiplier effect." I imagine Keynes genuinely loved the thought of saving his beloved market economy.


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