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Monday, July 2, 2012

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Economic Events of the Week

Monday – ISM Manufacturing Index
Tuesday – Factory Orders, Motor Vehicle Sales
Wednesday – Markets Closed For 4th of July
Thursday – Jobless Claims
Friday – Employment Situation

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e21 Reaction & Commentary
e21 Commentary: Did the Supreme Court Ruling Render the Health Law's Finances Untenable? (Charles Blahous)

Washington Update
Student Loan, Transportation Deal Sail Through Congress (Politico)
Senate Democrats Set Test Vote on Small-Business Tax Incentives (CQ)
Tax Issue Gives Republicans a Health Care Talking Point (National Journal)

Market Talk
Prices of Raw Goods Plunge on Slowdown (The Wall Street Journal)
Bond Market Backs Obama With Record Demand For New Debt (Bloomberg)
Banks Face Foreclosure Regulation by States (The Wall Street Journal)

Editorials & Opinions
Obama and 'The Wealth of Nations' (Michael Boskin in The Wall Street Journal)
Dodd-Frank: The Economic Case for Repeal (Peter Wallison in The American)
A Vast New Taxing Power (The Wall Street Journal Editorial)

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e21 Reaction & Commentary

e21 Commentary: Did the Supreme Court Ruling Render the Health Law's Finances Untenable? (Charles Blahous)

It is quite possible that this week’s Supreme Court ruling has just changed the 2010 health care law in such a way that it will add substantially to federal deficits from almost any vantage point. We will know more after the Congressional Budget Office completes its analysis. Let’s review the background. CBO’s last complete score of the health care law, in March 2011, found that it would reduce federal deficits by $210 billion from 2012-2021. That was before the suspension of the CLASS program provision, which takes the positive score down to $123 billion. As I pointed out in my recent study, those scores are not relative to actual prior law but to a hypothetical budget baseline scenario that CBO uses under the procedures of the Deficit Control Act. Relative to actual prior law, by contrast, the health law -- had it been upheld in its entirety -- would add more than $340 billion to federal deficits over the next ten years. Let’s nevertheless reference the positive score of $123 billion here since, flawed or not, it’s what arises under Congress’s scorekeeping rules. If this week’s ruling worsens the bill’s budget impact by more than $123 billion over ten years, then the legislation adds to federal deficits even by the standard adopted by its proponents. Will this score remain positive after the Supreme Court ruling?


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Washington Update

Student Loan, Transportation Deal Sail Through Congress (Politico)

Congress on Friday signed off on a deal to halt an increase in student loan interest rates that could affect more than 7 million people — clearing the way for President Barack Obama’s signature. Lawmakers moved quickly on Friday to end a legislative dispute that got caught up in politics on Capitol Hill and on the campaign trail, as Obama repeatedly blamed Congress for delaying and Republicans accused the president of being AWOL in negotiations. But on Friday, Senate leaders touted the bipartisan cooperation in ultimately reaching the agreement, which came earlier this week. “On the student loan issue, Republicans and Democrats worked hard to find common ground,” Senate Minority Leader Mitch McConnell said. “The agreement we’ve reached will ensure that college students, who are already facing enormous challenges in the Obama economy, won’t be paying higher interest rates next month. “This has been an incredibly productive week,” said Senate Majority Leader Harry Reid. “And it tops off a fruitful session.”

Senate Democrats Set Test Vote on Small-Business Tax Incentives (CQ)

In a bid to shift the spotlight to job creation, Senate Majority Leader Harry Reid on Friday laid the groundwork for a debate on a small-business tax relief package next month. The Nevada Democrat has set up a procedural vote on a package of tax benefits designed to give businesses incentives to buy new equipment and hire new workers. The test vote will be July 10. “In the coming weeks, we should remain focused on legislation that creates jobs and helps our economic recovery. Wasting precious time fighting old legislative battles does not create jobs,” Reid said in a statement. “I hope this bipartisan cooperation will continue as we move forward with a tax cut for small-business owners that will spur job creation and boost the middle class.” Senate Democrats previewed the jobs focus when speaking with reporters Thursday, after the Supreme Court’s decision to largely uphold the constitutionality of the 2010 health care overhaul law. Majority Whip Richard J. Durbin called on Republicans to support moving forward on the tax legislation and to continue a recent pattern of cooperation on transportation and farm policy bills.

Tax Issue Gives Republicans a Health Care Talking Point (National Journal)

Chief Justice John Roberts may have handed Democrats an unexpected and historic victory Thursday when he upheld their health care law, but at least he had the courtesy to give Republicans a talking point to soothe their pain. Besides vowing to once again vote in the House to repeal the health reform law, Republicans seized on Roberts’ decision that insurance mandate was within Congress’ power, because it is a tax. That, Republicans said, proves President Obama is a deceptive tax-and-spend liberal, as they’ve said all along. Democrats and the Obama administration originally said the insurance mandate was not a tax when they were working to pass the law in Congress. Of course, they changed their tune when they argued in front of the Supreme Court and lower courts, saying the mandate was within Congress’ power as a tax. Although that argument has been in black and white in briefs to courts for several months now, Republicans only started really harping about it Thursday. “The bill was sold to the American people on a deception,” Senate Minority Leader Mitch McConnell, R-Ky., said in a statement. “What the Supreme Court did was they completely rewrote the law, which they have a right to do,” Sen. Orrin Hatch, R-Utah, ranking member of the Senate Finance Committee, said in an interview.


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Market Talk

Prices of Raw Goods Plunge on Slowdown (The Wall Street Journal)

The sudden economic downdraft has caused one of the biggest and broadest declines in commodities prices since the financial crisis, surprising producers and creating a glut of raw materials around the world. From crude oil to copper to cotton, prices were down an average of 9% since late February, based on the Dow Jones-UBS Commodity Index. Crude-oil prices, well above $100 a barrel just two months ago, now fetch $84.96 on the New York Mercantile Exchange. Cotton prices have tumbled 22% so far this year. The benchmark steel price in the U.S. for hot-rolled coil is down 13% in two months, according to commodity-price reporting firm Platts. The declines mark a sharp turnaround from just a few months ago, when economists were optimistic about the prospects for a U.S. economic recovery, China still seemed to be humming and commodity supplies were generally tight. Since then, the outlook for demand has dimmed on growing evidence of a slowdown in China, a flare-up in the European debt crisis and new worries about the U.S. economy. On Sunday, China said the official purchasing managers' index fell in June to a seven-month low.

Bond Market Backs Obama With Record Demand For New Debt (Bloomberg)

Investors are plowing cash into new U.S. Treasuries at a record pace, making economic growth rather than budget austerity a key issue as President Barack Obama and Mitt Romney face off in November’s presidential election. Bidders offered $3.16 for each dollar of the $1.075 trillion of notes and bonds auctioned by the Treasury Department this year as yields reached all-time lows, above the previous high of $3.04 in all of 2011, according to data compiled by Bloomberg. The so-called bid-to-cover ratio was 2.26 from 1998 to 2001 when the nation ran budget surpluses. Even as Romney and fellow Republicans assail Obama for presiding over the increase of U.S. publicly-owned debt to $10.5 trillion from $5.75 trillion in 2009 amid the worst financial crisis since the Great Depression, the bond market is showing growing investor confidence in the safety of dollar assets. “The perceived stability of the U.S. financial system, where you have an active and aggressive Federal Reserve, and a broad $15 trillion-plus economy means the U.S. is going to continue to be regarded as a deep, liquid, strong area to invest in,” Rick Rieder, chief investment officer of fundamental fixed income at New York-based Blackrock Inc., which manages $3.68 trillion, said in a June 29 telephone interview. “Rates are going to stay low for a long time.”

Banks Face Foreclosure Regulation by States (The Wall Street Journal)

States across the country are proposing a range of new rules that would make it more difficult for banks to foreclose on troubled homeowners. The moves have been prompted by concerns that lenders have been inefficient in restructuring mortgages, which results in unnecessary foreclosures, while using shoddy paperwork to repossess homes. Lenders are strongly resisting the measures, arguing that they will introduce new bottlenecks in the foreclosure process that could obstruct the incipient housing recovery. "Should all 50 states decide to go down their own path, lenders are going to have multiple processes, each with their own little nuances, and every single penny of that cost will be borne by tomorrow's borrowers," said David Stevens, chief executive of the Mortgage Bankers Association. Such legislation is precisely what the nation's largest banks hoped to head off in February when they agreed to pay $25 billion in fines and borrower aid to settle allegations of foreclosure abuse with federal agencies and 49 state attorneys general. That settlement laid out standards for how banks must treat borrowers.


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Editorials & Opinions

Obama and 'The Wealth of Nations' (Michael Boskin in The Wall Street Journal)

President Obama should put Adam Smith's "The Wealth of Nations" at the top of his summer reading list. This was clear after listening to his 54-minute list of economic excuses and policy proposals delivered earlier this month on the campus of Cuyahoga Community College in Cleveland. At times Mr. Obama suggested that the profit motive is somehow ignoble, an opinion shared by many on the far left. But every student learns in introductory economics class that the pursuit of profits is essential to a successful economy, allocating resources to the use consumers value most. This is not exactly a new insight. Writing in 1776, Adam Smith noted, "It is not from the benevolence of the butcher, the brewer, or the baker that we can expect our dinner, but from their regard to their own interest." The president spent nearly an hour demonizing his Republican opponent Mitt Romney's economic policies and doubling down on his own failed agenda. He called for higher taxes on our most productive citizens and successful small businesses, more government spending and debt, and Washington micromanagement of wide swaths of the economy.

Dodd-Frank: The Economic Case for Repeal (Peter Wallison in The American)

As the second anniversary of the act approaches, its role in slowing our economic recovery is coming into focus. GDP growth shrunk immediately after the law passed and has never recovered, while key terms in the law remain undefined. It is rare that a single law can have a significant adverse effect on the enormous U.S. economy. But there has never been anything like the Dodd-Frank Act. Signed into law by President Obama on July 21, 2010, its extraordinary effect in slowing the economy is coming into focus as its second anniversary approaches. As shown in the chart below, the U.S. economy had a few reasonably good quarters of recovery after the crisis, particularly the third and fourth quarters of 2009 and the first quarter of 2010. These were not of Reagan quality, of course, but they suggested that the economy was beginning to heal. On June 30, 2010, however, the Democrat-controlled House voted along party lines to adopt the House version of Dodd-Frank. That was expected, of course, but two weeks later two Republican Senators—Scott Brown of Massachusetts and Olympia Snowe of Maine—announced they would vote for cloture in the Senate. These two votes virtually assured that the bill would pass the Senate and eventually become law. Almost immediately, GDP growth in the third quarter of 2010 began to slow. It has never recovered.

A Vast New Taxing Power (The Wall Street Journal Editorial)

The commentary on John Roberts's solo walk into the Affordable Care Act wilderness is converging on a common theme: The Chief Justice is a genius. All of a sudden he is a chessmaster, a statesman, a Burkean minimalist, a battle-loser but war-winner, a Daniel Webster for our times. Now that we've had more time to take in Chief Justice Roberts's reasoning, we have a better summary: politician. In fact, his 5-4 ruling validating the constitutional arguments against purchase mandates and 5-4 ruling endorsing them as taxes is far more dangerous, and far more political, even than it first appeared last week. This is a minority view. By right-left acclaim, at least among elites, the Chief Justice has engineered a Marbury v. Madison-like verdict that camouflages new limits on federal power as a reprieve for President Obama's entitlement legacy and in a stroke enhanced the Supreme Court's reputation—and his own. This purported "long game" appeals to conservatives who can console themselves with a moral victory, while the liberals who like to assail the Chief Justice as a radical foe of democracy can continue their tantrum. It's an elegant theory whose only flaw is that it is repudiated by Chief Justice Roberts's own language and logic. His gambit substitutes one unconstitutional expansion of government power for another and rearranges the constitutional architecture of the U.S. political system.


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