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Monday, May 21, 2012

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Economic Events of the Week

Monday – e21 Event - Medicare Numbers Examined: Blahous and Bernstein Discuss the Fiscal Consequences of the Health Care Law
Tuesday – Existing Home Sales
Wednesday – New Home Sales, EIA Petroleum Status Report
Thursday – Durable Goods Orders, Jobless Claims
Friday – Consumer Sentiment

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Story of the Day
Saez and Diamond on Taxes (Arpit Gupta in National Review)

Washington Update
Obama Pushes Wall Street Reform (Politico)
Mitch McConnell, John Boehner Double Down on Deficit Concerns (The Washington Post)
Lawmakers Look for Long-Term Solutions to Student-Loan Interest Rate (CQ)

Market Talk
Fiscal Stimulus (Econobrowser.com)
Factories Begin to Shift Back to US (Financial Times)
State Unemployment Rates decline in 37 states in April (Calculated Risk Blog)
SEC Move Set to Boost Covered Bonds in US (Financial Times)

Editorials & Opinions
Three Views of the 'Fiscal Cliff' (Edward Lazear in The Wall Street Journal)
Getting Even on Reliability (The Wall Street Journal Editorial
Should We Raise Taxes on Wall Street? (Suzy Khimm in The Washington Post)

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e21 Reaction & Commentary

Saez and Diamond on Taxes (Arpit Gupta in National Review)

Earlier, I discussed the work by Saez and Piketty on inequality. Though their research is valuable, its policy relevance is questionable given that much of the rise in inequality is concentrated among a very small fraction of Americans; and the welfare impact of this rise in upper-tail inequality on ordinary Americans has been limited.  Yet even if Saez and Piketty were right in pointing to a negative role of rising inequality, that fact by itself wouldn’t necessarily demand any public policy response. The higher progressive taxation needed to combat inequality may come with costs of its own. If the costs of taxation outweighed the benefits, than the ideal policy response to inequality, or the role of progressive taxation in general, would be limited.  Hence the level of attention garnered by a recent article by Emmanuel Saez, co-authored with Nobel Laureate Peter Diamond, arguing in favor of progressive taxation. While the headline result — that the top marginal tax rate “should” be 76% — has been widely broadcast, as always the estimate comes from a web of assumptions that are useful to unpack.


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Washington Update

Obama Pushes Wall Street Reform (Politico)

President Barack Obama is using the recent trading failures at JPMorgan Chase to push for quick implementation of strict regulations under the Wall Street reform act. In his weekly address to the nation Saturday, he took aim at GOP members of Congress, whom he said are hindering the process. “For the past two years, too many Republicans in Congress and an army of financial industry lobbyists have actually been waging an all-out battle to delay, defund and dismantle Wall Street reform,” Obama said. “Recently, we’ve seen why we can’t let that happen. We found out that a big mistake at one of our biggest banks resulted in a 2-billion-dollar loss. While that bank can handle a loss of that size, other banks may not have been able to.” The president outlined some of the requirements under the law, including that banks keep more cash on hand to help them to withstand losses, write a plan for closing down if they can’t, and ensure shareholders have a say in executive salaries. He also noted the creation of a consumer watchdog agency for financial products.

Mitch McConnell, John Boehner Double Down on Deficit Concerns (The Washington Post)

Republican leaders doubled down Sunday on a renewed push to secure spending cuts as part of any deal to increase the national debt limit, drawing a sharper line in an emerging fight over the issue. Using sharp rhetoric reminiscent of last summer’s fight over the issue, Senate Minority Leader Mitch McConnell (R-Ky.) said President Obama “needs to become the adult” in discussions with congressional leaders on spending and debt. “The Speaker and I have been the adults in the room, arguing that we ought to do something about the nation’s most serious long-term problem,” McConnell said on CBS’s “Face the Nation,” where he once again backed calls made this week by House Speaker John A. Boehner (R-Ohio) to cut government spending as part of any plan to raise the debt ceiling. But McConnell wouldn’t back Boehner’s calls to begin discussing the issue before the November elections, saying instead that he would wait for Obama to formally request an increase in the federal debt ceiling.

Lawmakers Look for Long-Term Solutions to Student-Loan Interest Rate (CQ)

While the partisan deadlock over student loans drags on, the top House and Senate education chiefs are signaling a potential area of compromise: Both say they are looking at an eventual return to a market-driven variable interest rate. Congress in recent weeks has been unable to agree on how to pay for a one-year extension of the current fixed 3.4 percent interest rate on subsidized federal student loans. Plenty of brinkmanship is expected next month, as the two chambers negotiate to prevent a scheduled doubling of the rate on July 1. House Education and the Workforce Chairman John Kline, R-Minn., said that he has been talking with Speaker John A. Boehner, R-Ohio, about how to shift, down the road, from a fixed interest rate for student loans to a market-driven variable rate. “We’re working and have been in discussion with the Speaker on what the longer-term solution is,” Kline said in a recent interview. “We’re going to have to go to a market-driven variable rate.”


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Market Talk

Fiscal Stimulus (Econobrowser.com)

My colleague UCSD Professor Valerie Ramey has an interesting new paper looking at the effects of higher government spending on GDP. Ramey (2012) approaches the question from a forecasting perspective. Suppose a certain event (examples of which are detailed below) causes you to revise your forecast of how high government spending is going to be over the next few years. How would this news cause you to change your forecast of how high private GDP (that is, all the components of GDP other than government spending) is going to be? If your prediction of private GDP goes up, that is evidence consistent with a fiscal multiplier greater than one-- added government spending not only contributes directly to GDP from the accounting identity, but also helps boost private spending as well. If private GDP goes down, that suggests a multiplier less than one.

Factories Begin to Shift Back to US (Financial Times)

Two-thirds of big US manufacturers have moved factories in the past two years, with the most popular destination being the US, according to a survey being released on Monday by Accenture, the consultants. The report provides some of the first industry-wide empirical evidence of “reshoring,” the trend of jobs once outsourced to low-cost emerging economies being brought back to the US. Although the subject has received much attention, with General Electric the most high-profile example, most of the evidence so far has been isolated and anecdotal. President Barack Obama has proposed tax incentives for companies that move their overseas operations back to the US and tax penalties for those that do not. “If you’re a business that wants to outsource jobs, you shouldn’t get a tax deduction for doing it,” Mr Obama said in this year’s State of the Union address. “No American company should be able to avoid paying its fair share of taxes by moving jobs and profits overseas.”

State Unemployment Rates decline in 37 states in April (Calculated Risk Blog)

From the BLS, Regional and State Employment and Unemployment Summary:  “Regional and state unemployment rates were little changed in April. Thirty-seven states and the District of Columbia recorded unemployment rate decreases, five states posted rate increases, and eight states had no change, the U.S. Bureau of Labor Statistics reported today. Forty-eight states and the District of Columbia registered unemployment rate decreases from a year earlier, while only one state experienced an increase and one had no change. Nevada continued to record the highest unemployment rate among the states, 11.7 percent in April [down from 12.0 in March]. Rhode Island and California posted the next highest rates, 11.2 and 10.9 percent, respectively. North Dakota again registered the lowest jobless rate, 3.0 percent, followed by Nebraska, 3.9 percent, and South Dakota, 4.3 percent.”

SEC Move Set to Boost Covered Bonds in US (Financial Times)

Covered bonds, a centuries-old mainstay of the European markets, may get a big boost in the US after the Securities and Exchange Commission loosened restrictions on who can buy the bundled mortgage debt. Covered bonds have surged in popularity in recent years with record amounts sold to investors worldwide. In the US, however, sales of the bonds have been restricted to only “qualified institutional investors” under rule “144A” governing securities sales, placing a cap on demand for the debt. The SEC published a so-called “no action” letter on Friday which will allow Royal Bank of Canada to sell covered bonds into the US market as a normal public offering of securities. That is the first time the regulator has said it will allow covered bonds to be “registered” in the US. Since registered securities are not restricted to a particular investor type, the SEC’s decision could pave the way for new investors to buy the bonds. That could further boost demand for the product and potentially lead other non-US banks to sell registered covered debt in the US market to a wider array of buyers.


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Editorials & Opinions

Three Views of the 'Fiscal Cliff' (Edward Lazear in The Wall Street Journal)

Discussion of the so-called fiscal cliff—the combination of tax increases and spending cuts that will come in 2013 if Congress and the president don't act—confuses a number of different issues. The evidence suggests that we should fear the tax hikes, but not necessarily the spending cuts. Anyone who uses the term "fiscal cliff" accepts a Keynesian view of the economy, knowingly or not. Both tax increases and constrained spending are assumed to be bad for the economy. But there are two other views: that of the budget balancer and that of the supply-sider. Rather than term the impending changes that will occur in 2013 a "fiscal cliff," the budget balancer thinks of this as "fiscal consolidation." Tax increases reduce the deficit, as do cuts in government spending. Both are austerity measures that make the government more responsible and, therefore, both are conducive to long-run economic growth. Those who support the Simpson-Bowles plan subscribe, at least in part, to this view. Various proponents of the plan may place different weights on the tax-increase side or the spending-decrease side because they believe the economic consequence of one or the other is more adverse. But fundamentally, the target is to decrease the deficit. The budget balancer regards both tax increases and spending cuts as moves in the right direction.

Getting Even on Reliability (The Wall Street Journal Editorial)

Imagine if some obscure trading desk within J.P. Morgan had tried to warn Jamie Dimon about corporate malfeasance—or perhaps a risky investment—and it turned out he tried to shut up the whistleblower. We'd never hear the end of it. Somehow the same norms don't apply in government, as shown by a federal energy regulator's reprisals against an independent advisory body. The target is the North American Electric Reliability Corporation, or NERC, and its crime is scrutinizing the Obama Administration's anticarbon agenda. This highly respected nonprofit has monitored the power system since the 1960s and establishes best practices to keep the lights on. In 2005, Congress gave NERC a formal role as adviser. But now it may be defrocked for questioning the "pace and aggressiveness" of the Environmental Protection Agency's regulatory wave in a 2010 report. NERC's position is that the EPA goal of mothballing many or most coal-fired power plants could endanger the security of the electric-power grid, with possible blackouts and much higher energy costs. In a follow-up report last year it found that "Environmental regulations are shown to be the number one risk to reliability over the next one to five years." Apparently that was too honest for Washington. Earlier this month the Federal Energy Regulatory Commission disclosed that it has spent months conducting a highly unusual audit of NERC. The commission oversees NERC under the 2005 law, so it has every right to check its practices. But this probe exceeded normal auditing standards and was a free-floating investigation into NERC's "economy and efficiency," whatever that means. It didn't find any rule-breaking.

Should We Raise Taxes on Wall Street? (Suzy Khimm in The Washington Post)

The idea, admits tax lawyer Lee Sheppard, would prompt bankers to “look at you balefully, like you just ran over their dog.” But advocates for higher taxes on Wall Street trading hope the proposal gets a second hearing--particularly since JPMorgan’s messy loss has raised new questions about the risks that big banks are still taking. They argue that a tax on trading would not only raise needed revenue, but also help curb some of the speculative, risky activities that make the markets so volatile--preventing, perhaps, the next “London Whale.” The most popular proposal has been the Financial Transactions Tax, popularly known as the “Robin Hood Tax.” It’s already been implemented in 11 European countries--Britain, for example, has taxed stock trading since 1986--and the European Union is deliberating whether to impose it across the continent. An alternative proposal from the International Monetary Fund would tax traders’ net profits and wages--known as the Financial Activities Tax, or--oh yes--the FAT. As it stands now in the U.S., “trading can be too cheap,” Sheppard said, speaking Friday at the Tax Policy Center. “Everything we have done since May 1975 in securities regulation has made trading cheaper and cheaper and cheaper.” Dodd-Frank has tried to restrict speculation and systemically risky trading through new rules, but taxes on trading aren’t part of the legislation.


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