dashed-line

Thursday, July 5, 2012

dashed-line
Economic Events of the Week

Thursday – Jobless Claims
Friday – Employment Situation

dashed-line
Story of the Day
Monetary Policy and the Next Crisis (John Taylor in The Wall Street Journal)

Washington Update
Issa Report: VIP Loans Brought Influence (Politico)
IMF: Euro Crisis, ‘Fiscal Cliff’ Put U.S. Economy in Jeopardy (CQ)
In Light of Health Care Ruling, Panel Sets Hearing on Congress’ Power to Tax (CQ)
Romney: Health-Care Mandate is A Tax (The Washington Post)

Market Talk
The Handoff – Manufacturing to Housing (Oregon Office of Economic Analysis)
Rents Increase as Vacancies Dry Up (The Wall Street Journal)
Markets Await ECB Policy Decision (Financial Times)

Editorials & Opinions
Towards a Sustainable Recovery. (Raghu Rajan in Chicago Booth)
Debt Fireworks Continue On This Independence Day (John Taylor Blog)
US Pensions: Diminishing Returns (Financial Times Editorial)

dashed-line

Story of the Day

Monetary Policy and the Next Crisis (John Taylor in The Wall Street Journal)

At its annual meeting of the world's central bankers in Switzerland last week, the Bank for International Settlements—the central bank of central banks—warned about the harmful "side effects" of current monetary policies "in the major advanced economies" where "policy rates remain very low and central bank balance sheets continue to expand." These policies "have been fueling credit and asset price booms in some emerging economies," the BIS reported, noting the "significant negative repercussions" unwinding these booms will have on advanced economies. The BIS emphasizes the view that international capital flows stirred up by monetary policy were a primary factor leading to the preceding crisis and that these flows would lead to the next one. This is in stark contrast to the "global saving glut" hypothesis—which says that the funds pouring into the U.S. in the previous decade originated largely from the surplus of exports over imports in emerging market economies. The BIS should be taken seriously. It warned long in advance about the monetary excesses that led to the financial crisis of 2008.


arrow Back to Top dashed-line

Washington Update

Issa Report: VIP Loans Brought Influence (Politico)

Failed mortgage company Countrywide Financial used a VIP program - including loans to lawmakers, key congressional staffers and executive-branch officials - to help the company wield influence and block legislation that would have cut into its profit margin, according to a House investigation. Countrywide also gave VIP loans to top officials at Fannie Mae, the government-sponsored mortgage giant, according to a new report by the House Oversight and Government Reform Committee, chaired by Rep. Darrell Issa (R-Calif.). More than a half-dozen current and former lawmakers, including Senate Budget Committee Chairman Kent Conrad (D-N.D.) and House Armed Services Committee Chairman Buck McKeon (R-Calif.), obtained mortgages through the Countrywide VIP program, in some cases saving thousands of dollars, according to the new Issa report, set for release Thursday.

IMF: Euro Crisis, ‘Fiscal Cliff’ Put U.S. Economy in Jeopardy (CQ)

The International Monetary Fund, forecasting only “tepid” growth in the U.S. economy over the next two years, warned Tuesday that the impasse in Washington over tax and spending issues threatens to cut short the economic recovery and damage a fragile global economy. In its annual report on the American economy, the IMF said “strong headwinds” from slowing consumer demand and household de-leveraging will hold U.S. economic growth to 2 percent over the full year and 2.3 percent next year, with an unemployment rate now at 8.2 percent slipping only to 7.9 percent on average during 2013. The IMF said that even modest growth is threatened by “contagion from the intensification of the euro-area debt crisis” and the many fiscal issues, including the expiring 2001 and 2003 tax cuts and automatic budget cuts, the country faces at the end of the year.

In Light of Health Care Ruling, Panel Sets Hearing on Congress’ Power to Tax (CQ)

A House committee is scheduled to hold a July 10 hearing on the Supreme Court’s decision to uphold a central provision of the health care overhaul as a tax, one day before the chamber is slated to vote on repealing the law. The Ways and Means hearing announced Tuesday will focus on the impact of the June 28 ruling on Congress’ constitutional power to levy taxes. In the majority opinion, Chief Justice John G. Roberts Jr. wrote that the law’s requirement that most individuals maintain health coverage or pay a penalty — known as the individual mandate — falls within Congress’ authority to tax.

Romney: Health-Care Mandate is A Tax (The Washington Post)

Mitt Romney said Wednesday that a mandate in President Obama’s signature health-care law is “a tax,” contradicting a position his campaign staked out this week and belatedly getting in line with many other Republican leaders. The presidential candidate said in an interview with CBS News that he accepts last week’s Supreme Court decision, which upheld the legislation. The law’s individual mandate, which imposes a fine on those who do not obtain health insurance, is a tax, the court ruled, and is therefore constitutional under Congress’s power to assess taxes. On Monday, senior Romney adviser Eric Fehrnstrom said the former Massachusetts governor rejected the court’s characterization and believed that the individual mandate was a penalty, not a tax. Although Romney’s comments on Wednesday opened him up to renewed criticism from Democrats that he had changed positions for political expediency, campaign spokeswoman Amanda Henneberg maintained that his remarks “were in line” with what Fehrnstrom said Monday.


arrow Back to Top dashed-line

Market Talk

The Handoff – Manufacturing to Housing (Oregon Office of Economic Analysis)

As you may have heard, the latest reading on the ISM Manufacturing index declined in June to a level of 49.7. The index is designed such that values of over 50 indicate expansion while values below 50 indicate contraction. This marked the first time since July 2009 that the index registered in contraction territory. Now, does that mean the economy is doomed? Not neccessarily. Even after a slowdown in manufacturing, the industry can and likely will continue to grow in the coming years, just that the growth is and was not expected to remain consistently strong. Second and more importantly ... is the transition from manufacturing to housing as a major economic driver. ... Residential Investment (new home construction) is now growing nearly 10% year-over-year while the manufacturing cycle is slowing. In the recovery so far, beyond personal consumer expenditures, exports and investment – largely the manufacturing cycle – have been significant contributors, while the housing downturn continued to languish. Now, housing growth has returned but the industry is not yet doing the heavy lifting. The much stronger growth in housing is not expected until 2013 and 2014 in our forecast ...

Rents Increase as Vacancies Dry Up (The Wall Street Journal)

Landlords boosted apartment rents to record levels in the second quarter as demand from tenants sitting out the home-buying market pushed vacancy rates to their lowest point in more than a decade, according to a report to be released Thursday. Despite the sluggish economy, average rents increased in all 82 markets tracked by Reis Inc., a real estate data firm. Average rents are now at record levels in 74 of those markets and now top $1,000 a month on average in 27 of them, including Miami, Seattle, San Diego, Chicago and Baltimore. The biggest rent boost of the second quarter was in New York City, where the average rose to $2,935 per month, up 1.7% from the first quarter. Apartment rents also increased in markets that have been hard hit by the economic downturn such as Las Vegas and Phoenix, where they rose 0.9% and 1% respectively in the second quarter. The lowest average rent among the markets surveyed was Wichita, Kan., where the average was $510 a month.

Markets Await ECB Policy Decision (Financial Times)

Traders are gently trimming positions in some growth-sensitive positions, but moves are slight as the market prepares for European monetary policy decisions and top drawer US macroeconomic data. The FTSE All-World equity index is flat as the FTSE Eurofirst opens with a loss of just 0.04 per cent and after the Asia-Pacific region dipped fractionally. US futures point to Wall Street returning from the Independence Day holiday with a 0.2 per cent pullback.  Industrial-demand barometers are softer, with copper off 0.9 per cent to $3.51 a pound and Brent crude shedding 15 cents to $99.62 a barrel. Such “risk” assets had a decent rally over the previous four sessions – the All-World adding 4.4 per cent, Brent bouncing 9.1 per cent – as the market began to price in expectations that central banks will inject further liquidity in the hope of bolstering waning economic activity.


arrow Back to Top dashed-line

Editorials & Opinions

Towards a Sustainable Recovery. (Raghu Rajan in Chicago Booth)

To understand how to achieve a sustained recovery from the Great Recession, we need to understand its causes. And identifying causes means starting with the evidence. Two facts stand out. First, overall demand for goods and services is much weaker, both in Europe and the United States, than it was in the go-go years before the recession. Second, most of the economic gains in the US in recent years have gone to the rich, while the middle class has fallen behind in relative terms. In Europe, concerns about domestic income inequality, though more muted, are compounded by angst about inequality between countries, as Germany roars ahead while the southern periphery stalls. Persuasive explanations of the crisis point to linkages between today’s tepid demand and rising income inequality. Progressive economists argue that the weakening of unions in the US, together with tax policies favoring the rich, slowed middle-class income growth, while traditional transfer programs were cut back. With incomes stagnant, households were encouraged to borrow, especially against home equity, to maintain consumption.

Debt Fireworks Continue On This Independence Day (John Taylor Blog)

On Independence Day two years ago I wrote a piece comparing America’s exploding debt projection (from the 2009 and 2010 Congressional Budget Office’s Long Term Budget Outlook) with the fireworks on the 4th of July. As I later put it in First Principles (p. 101) the debt projection's "soaring upward climb resembles the fireworks on America's Independence Day. But rather than remind us of America's founding, it portends America's ending.” Here is the chart I was referring to, hoping that the Congress and the Administration would get their act together so CBO would be able to project something more responsible in 2011. Well, after two more years of Long Term Budget Outlooks (2011 and 2012) the CBO projections unfortunately look virtually the same. The problem has not been fixed as my grand daughter requested in my Economics 1 class at Stanford nearly three years ago. In fact, only one thing has really changed. CBO put a ceiling on its projections. They now stop reporting the debt to GDP ratio once it hits 250% or more, as if Congress finally voted for such a debt ceiling in a binding way. CBO used to go out 75 years, but now they just stop when things look really bad. So, as shown below, the latest projection (in green) now stops in 2042 when the debt hits 247 percent of GDP.

US Pensions: Diminishing Returns (Financial Times Editorial)

Pensions hang over economies like death. Serious, complicated, but thankfully a problem some way down the road. But the future cannot be put off forever. Company and state obligations to employees (in some cases very big obligations) eventually have to be reckoned with. So all credit to America’s Governmental Accounting Standards Board for tightening the rules for public pensions last week. Forcing sponsors to adopt more conservative assumptions about returns will probably expose a further $600bn deficit for US state pensions to add to the current $3,400bn blackhole. The new policies have handed some political ammunition to those who want to cut worker benefits and bust unions, but the state of state pensions has been a poorly kept secret for decades. Deciding who should pay for the mess will be painful, but a fair settlement will be easier to achieve, and more effective, if based on realistic data. Just as states are being asked to confront problems, corporations are being encouraged to play down theirs. Congress wants to let companies use long-term average rates to calculate the present value of their liabilities for certain plans – reducing the apparent size of their obligations – to lower contributions and boost tax revenues. That would be a big mistake.


arrow Back to Top dashed-line

solid-line

e21: Economic Policies for the 21st Century is a nonprofit, nonpartisan organization dedicated to economic research and innovative public policies for the 21st century. Drawing on the expertise of practitioners, policymakers, and academics, we aim to advance free enterprise, fiscal discipline, economic growth, and the rule of law.

solid-line_1px

2011, e21: Economic Policies for the 21st Century


1150 17th Street, NW - Suite 504 - Washington, DC 20036
Phone: 202-232-0090 | Email: info@economics21.org

52 Vanderbilt Avenue - New York, New York 10017
Phone: 646-673-8539 | Email: info@economics21.org