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Monday, June 11, 2012

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Economic Events of the Week

Tuesday  Import and Export Prices, Treasury Budget
Wednesday – Senate Banking Committee Hearing - "A Breakdown in Risk Management: What Went Wrong at JPMorgan Chase?" JPMorgan Chase’s Jamie Dimon Testifies, Producer Price Index, Retail Sales, EIA Petroleum Status Report
Thursday – Jobless Claims, Consumer Price Index
Friday – Industrial Production

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e21 Reaction & Commentary
e21 Commentary: What the Recent CBO Reports Tell Us About Fiscal Stimulus and the Federal Budget (Charles Blahous)
In Case You Missed It: The 'Government Sector of the Economy' Canard

Washington Update
W.H.'s Continental Calculations (Politico)
Obama’s Political Gaffe Will be Fodder in General Election (The Washington Post)
Obama and Congressional Republicans Trade Barbs Over Economy (CQ)

Market Talk
NY Fed to Auction $7bn AIG Toxic Assets (Financial Times)
Obama Housing Fix Faltered On Carrots-Not-Sticks Policy (Bloomberg)
Top 400 Taxpayers Paid Almost As Much in Federal Income Taxes in 2009 as the Entire Bottom 50% (Mark J. Perry Blog)

Editorials & Opinions
No More Welfare For Banks (Thomas Hoenig in The Wall Street Journal)
Honey, I Shrunk the Entitlement (The Wall Street Journal Editorial)
The Political Limits of Central Bankers (Financial Times Editorial)

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e21 Reaction & Commentary

e21 Commentary: What the Recent CBO Reports Tell Us About Fiscal Stimulus and the Federal Budget (Charles Blahous)

The Congressional Budget Office (CBO) recently released two important reports on the federal budget. One analyzes the short term, the other the long term. The first report explains what is projected to happen, both to the federal budget and to the larger economy, in the near term due to year-end expirations of various tax and spending policies. The other report projects what will happen to the federal budget over the upcoming decades. Both reports analyze two scenarios; first, if certain provisions of current law (raising taxes and cutting spending) are upheld, and second, if they are legislatively overridden. The findings of CBO’s gloomy long-term report come as no surprise. Over the most recent four years, the U.S. government has engaged in continued massive deficit spending on a scale not seen since World War II. CBO finds that the continuation of such policies in future years will lead to federal fiscal ruin and severe economic hardship. The short-term report is more nuanced. CBO finds that continued deficit-spending will increase economic growth in the near-term but weaken growth over the long term.

In Case You Missed It: The 'Government Sector of the Economy' Canard

In a press conference on Friday June 8, President Obama explained that reduced public sector spending lies at the heart of our economic problems. The President drew immediate fire for suggesting that “the private sector is doing just fine” despite the fact that the private sector has generated only 73,000 net new jobs, on average, the past two months. The real problem, according to the President, is cutbacks at the state and local government level initiated by “Governors or mayors who are not getting the kind of help that they have in the past from the federal government.” While it’s unfortunate that the President decided to embrace the “government sector of the economy” canard, this critique is especially confounding given that government spending under President Obama has been 20% higher (as a share of the economy) than the average since 1946.
For a deeper dive on the changing role of government and its priorities – including a review of how a big increase in public spending over the last few years has actually translated into fewer public services – be sure to check out last week’s commentary.


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Washington Update

W.H.'s Continental Calculations (Politico)

President Barack Obama’s wonky international economics lecture at Friday’s surprise press conference was as far as he could go to shape an issue that could haunt the 2012 campaign. If Europe takes a sharp turn for the worse, a scenario that includes a messy Greek exit from the eurozone and possible bank failures and economic collapse in Spain, Italy and elsewhere, the American economy could easily slip back into recession or even depression and a very close election would likely slip out of the president’s grasp. If Europe instead finally comes up with the kind of unified, market-pleasing, shock-and-awe response that Obama and his deputies are pressing them hard in private to adopt, it means a cataclysm could probably be averted, at least until after Nov. 6. Forget about swing state polling or whom Mitt Romney picks as his running mate. In an election that’s about the economy and with so much riding on what Europe does, the answer to this question could determine who takes the oath of office next January.

Obama’s Political Gaffe Will be Fodder in General Election (The Washington Post)

Here’s an unpopular opinion: Political gaffes matter. After President Obama’s assertion Friday that “the private sector is doing fine” — and his subsequent attempt to clean up the rhetorical mess he made for himself — many Democrats insisted that while it wasn’t his best moment, it was far from consequential in his reelection race. After all, they argued, who watches cable television in the middle of the day on a Friday? And in an election about big things — the overall health of the economy, America’s place in the world — who would ultimately care or be swayed by a single out-of-context statement made by the president? (The point Obama was trying to make, however inartfully, was that the private sector was performing far better than the public sector.) All true. But also all missing the point. Let’s break down the argument piece by piece. First, while it is true that midday cable television viewership is low, that rationale completely disregards the media world in which we live, where even the smallest comment can be amplified into a national headline in minutes. Is there anyone paying even passing attention to politics who hasn’t seen the Obama clip five times at this point — which, by the way, is less than 96 hours after he said it? Answer: no. Then there is the reality that gaffes such as the one Obama made Friday are quickly — and, usually, effectively — used by the other side to score political points. Republican presidential candidate Mitt Romney’s campaign already is out with a Web video featuring Obama’s private-sector comments juxtaposed against a series of dire testimonials from people about their economic struggles. “No, Mr. President, we are not ‘doing fine,’ ” reads the text on screen at the close of the video.

Obama and Congressional Republicans Trade Barbs Over Economy (CQ)

President Obama and Republican leaders in Congress clashed Friday over whether spending on government programs to spur job growth or extending tax cuts and curbing regulations is the best way to give the economy momentum. Obama said Congress’ lack of action on a jobs package he unveiled last September has cost the economy 1 million jobs and contributed to the weakening economy. “Of course Congress refused to pass this jobs plan in full,” Obama said during a White House news conference. “They left most of the jobs plan just sitting there, and in light of the headwinds we are facing right now I urge them to reconsider because there are steps we can take right now.” Top Republican leaders wasted no time rejecting the president’s analysis, saying his policies — particularly the 2010 health care overhaul and opposition to extending all of the 2001 and 2003 tax cuts, and not spending reductions — are weighing down the economy.


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Market Talk

NY Fed to Auction $7bn AIG Toxic Assets (Financial Times)

The Federal Reserve Bank of New York this week plans to auction more than $7bn in face value of “toxic” securities related to the government bailout of American International Group, the insurer, in a sale that some analysts said could enable the repayment of the last loan owed to the New York Fed from the controversial rescue. The New York Fed will take bids on Wednesday and Friday for securities in collateralised debt obligations, CDOs, held in a vehicle called Maiden Lane III that was set up as part of AIG’s bailout in 2008. The success of the sale hinges on the demand for risky, high-yielding assets, which has been curtailed in recent weeks by renewed concerns about the debt crisis in Europe and the US economic recovery. Some analysts were surprised the New York Fed would proceed with such a large sale in a volatile market. Others were optimistic that the New York Fed was in striking distance of being repaid on the balance of a $24.3bn loan to Maiden Lane III. Along with $5bn of equity from AIG, the vehicle used the money to buy the CDO securities from large banks to cancel loss-producing derivatives trades at AIG. Including collateral AIG had posted on the trades, the banks received 100 cents on the dollar in what critics have called a backdoor bailout of Wall Street.

Obama Housing Fix Faltered On Carrots-Not-Sticks Policy (Bloomberg)

Three years ago, when President Barack Obama unveiled his plan for solving the U.S. housing crisis, one in five borrowers owed more on mortgages than their homes were worth, banks were repossessing 74,000 homes per month and sale prices had plunged 30 percent from their 2006 peak. “All of us will pay an even steeper price if we allow this crisis to deepen -- a crisis which is unraveling homeownership, the middle class, and the American Dream itself,” Obama told the audience gathered at a high school in Mesa, Arizona, an area with one of the highest foreclosure rates in the country. The crisis did deepen. Home prices continued to fall in most states during the Obama administration. Nearly 23 percent of borrowers are underwater on their loans, virtually unchanged from 2009, according to real estate data firm CoreLogic.

Top 400 Taxpayers Paid Almost As Much in Federal Income Taxes in 2009 as the Entire Bottom 50% (Mark J. Perry Blog)

We hear all the time that the "rich don't pay their fair share of taxes" (123,000 Google search results for that phrase).  Here's an analysis using recent IRS data that suggests otherwise. 1. In 2009, the top 400 taxpayers based on Adjusted Gross Income earned $81 billion as a group, and paid $16.1 billion in federal income taxes (see chart above). 2. In 2009, the bottom 50% of taxpayers, a group totaling 69 million, earned collectively more than $1 trillion and paid $19.5 billion in federal income taxes (see chart above). Bottom Line: A small group of 400 of America's most successful earners in 2009, about the number of residents living in a typical apartment building in Washington, D.C., paid almost as much in federal income taxes as the entire bottom half of America's 138 million tax filers, which is a population equivalent to the combined number of residents living in America's 29 least populated states, plus the District of Columbia.  What makes this disparity possible is the fact that an estimated 47% of individual income tax returns filed in 2009 had a zero or negative tax liability.


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Editorials & Opinions

No More Welfare For Banks (Thomas Hoenig in The Wall Street Journal)

I have a proposal to strengthen the U.S. financial system by simplifying its structure and making its institutions more accountable for their mistakes. Put simply, my proposal would help prevent another 2008-style crisis by prohibiting banking organizations from conducting broker-dealer or other trading activities and by reforming money-market funds and the market for short-term collateralized loans (repurchase agreements, or repos). In other words, Glass-Steagall for today. Those opposed to taking these actions generally focus on two themes. First, they say that if Glass-Steagall—enacted in 1933 to separate commercial and investment banking—had been in place, the crisis still would have occurred. Second, they argue that requiring the separation of commercial banking and broker-dealer activities is inconsistent with a free-market economy and puts U.S. financial firms at a global competitive disadvantage. Both assertions are wrong.

Honey, I Shrunk the Entitlement (The Wall Street Journal Editorial)

One detail revealed by Tuesday's debt forecast is that there's another budget gimmick that makes it seem as if ObamaCare costs less than it really will, and the ruse deserves more scrutiny than it's received. Who was it who said we need to pass the bill to find out what's in it? The Congressional Budget Office explained clearly for the first time that the Affordable Care Act's subsidies aren't indexed over the long term. Indexation is the standard practice that adjusts policies so they are constant over time as the value of the dollar and the cost of living change. Social Security payments, for example, rise automatically to preserve their purchasing power. When Congress created the Alternative Minimum Tax (AMT) in 1969 to target 21 millionaires, it didn't index its income brackets, which is why it now hits the middle class. ObamaCare's insurance subsidies are like an AMT in reverse. People making up to 400% of the poverty line—or about $96,000 for a family of four in 2016—are eligible for refundable tax credits to offset the premiums and cost-sharing of their government-approved health plans. The system is insanely complicated, but the amounts of the tax credits vary by how much people earn and rise over time so that people never contribute more than a certain share of their paycheck to health care.

The Political Limits of Central Bankers (Financial Times Editorial)

Economists used to say that when the US sneezes, the rest of the world catches a cold. It is time to update the adage: the eurozone – not the US – is the source of the virus that threatens to infect the global economy. Reports that Spain is about to seek European help to recapitalise its banks have shaken equity markets. With Europe, the US, China and many emerging economies all slowing down, investors are bracing themselves for the next shock. Yields on haven bonds such as US Treasuries and German Bunds are falling to record lows. In the search for a new cure – or at least an analgesic – analysts this week turned to the world’s most powerful central banks. In Europe and the US the authorities disappointed expectations, steering away from monetary stimulus. Only the People’s Bank of China chose to act, cutting its main interest rate by 25 basis points, to 6.31 per cent. Mario Draghi, president of the European Central Bank, is manifestly concerned about the state of the economy, but the ECB left the policy rate at 1 per cent. This was hardly a sign that the ECB is worried about inflation. The more likely explanation is that the central bank wants the politicians to take the necessary and long-promised steps needed to secure the currency bloc.


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