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Monday, July 9, 2012

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Economic Events of the Week

Monday – Remarks by the President On Tax Cut Extensions
Wednesday – International Trade, FOMC Minutes
Thursday – Jobless Claims
Friday – Producer Price Index

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e21 Reaction & Commentary
e21 Commentary: U.K. Experience Casts Doubt on Viability of Keynesian Remedies

Washington Update
Health Care Repeal Likely in House (CQ)
Senate, House Farm Bills Follow Different Paths (Politico)
Democrats, Republicans Square Off Over Taxes (National Journal)
Status of Fiscal 2013 Spending Bills (CQ)

Market Talk
Weak Report Lifts Chance of Fed Action (The Wall Street Journal)
US Set for Earnings Roadblock as Growth Falters (Financial Times)
Brace Yourself, Real Estate Prices Are Going Back Up (Bloomberg)

Editorials & Opinions
Monetary Policy and the Next Crisis (John Taylor in The Wall Street Journal)
Why U.S. Economic Policy is Paralyzed (Robert Samuelson in The Washington Post)
America’s Stalling Recovery Crisis (Financial Times Editorial)

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e21 Reaction & Commentary

e21 Commentary: U.K. Experience Casts Doubt on Viability of Keynesian Remedies

With the Supreme Court’s decision to largely uphold the health care overhaul behind them, House Republicans are pushing forward with a July 11 floor vote on legislation that would repeal the law, while Senate Republicans are divided on how to attack it this summer and fall. House GOP leadership announced the repeal vote on June 28, the same day the high court released its ruling. A spokeswoman for Majority Leader Eric Cantor, R-Va., said floor debate is expected to begin Tuesday. Democrats are likely to use the debate to tout the popular benefits of the 2010 law, such as the provision that allows young adults to stay on their parents’ health insurance plans until they turn 26, and to criticize the GOP for spending time on repeal instead of focusing on the economy. But Republicans have maintained that the overhaul stifles economic growth and hiring, and raises health care costs.


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Washington Update

Senate, House Farm Bills Follow Different Paths (Politico)

To look behind the numbers for the House and Senate farm bills is to see rival visions of the government’s role in agriculture — each playing on the different ambitions and anxieties of farmers themselves. The centerpiece for the Senate is a new taxpayer-financed “shallow-loss” program that reduces deductibles on crop insurance and can be tailored to each farm’s output. This plays to the “Captain of My Ship” side of farming, and for Midwest corn and soybean producers — already riding a wave of high prices — it’s a bold, enticing view. The House draft — to be marked up this week by the Agriculture Committee — bears the imprint of the South, which not only lost Tara but lives in fear of price swings on world markets and having no safety net.

Democrats, Republicans Square Off Over Taxes (National Journal)

Leading Democrats and Republicans continued to square off over taxes on Sunday, with Senate Minority Leader Mitch McConnell calling on the White House to extend all of the Bush era tax cuts and Obama campaign advisor Robert Gibbs reiterating that the president would veto any bill that didn't raise rates on the rich. Speaking on CNN’s State of the Union, McConnell said allowing the rates to rise January 1 would bring the economy's tepid recovery to a complete halt. The wiser course, McConnell argued, would be to extend all of the tax cuts for one more year to allow negotiators from both parties to reach a lasting deal. Minutes later, on the same show, Gibbs rejected that call out of hand, reiterating that the Obama administration would veto any bill extending all of the Bush era tax cuts, even though their expiration would raise taxes on the middle classes as well as the wealthy.

Status of Fiscal 2013 Spending Bills (CQ)

Although both chambers might work on appropriations measures this month, Congress appears unlikely to clear many, or perhaps any, fiscal 2013 spending bills before Election Day. Before the new fiscal year starts Oct. 1, Congress will need to clear a stopgap funding measure, or continuing resolution (CR). House Republican leaders have lined up three spending bills for possible passage during July, with the Defense measure the most likely to reach the floor. Also being considered for floor action are the Agriculture and Financial Services bills. The White House has issued veto warnings on all the House spending bills that have reached the floor, saying the president will not accept the bills because the House’s overall discretionary spending target of $1.028 trillion is $19 billion below the level agreed to in last year’s Budget Control Act (PL 112-25). Following is a breakdown of individual bills...

Health Care Repeal Likely in House (CQ)

With the Supreme Court’s decision to largely uphold the health care overhaul behind them, House Republicans are pushing forward with a July 11 floor vote on legislation that would repeal the law, while Senate Republicans are divided on how to attack it this summer and fall. House GOP leadership announced the repeal vote on June 28, the same day the high court released its ruling. A spokeswoman for Majority Leader Eric Cantor, R-Va., said floor debate is expected to begin Tuesday. Democrats are likely to use the debate to tout the popular benefits of the 2010 law, such as the provision that allows young adults to stay on their parents’ health insurance plans until they turn 26, and to criticize the GOP for spending time on repeal instead of focusing on the economy. But Republicans have maintained that the overhaul stifles economic growth and hiring, and raises health care costs.


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Market Talk

Weak Report Lifts Chance of Fed Action (The Wall Street Journal)

Friday's disappointing jobs report increases the likelihood that the Federal Reserve will launch a new bond-buying program to boost economic growth, though it doesn't ensure such a move. Fed officials emerged from their policy meeting in late June frustrated by the slow pace of the recovery and worried that the economic outlook was deteriorating. Economic data released since then have done little to allay those concerns, according to public comments by some officials and interviews with them before Friday's employment report. Yields on 10-year Treasury notes fell to 1.54% on Friday, near the lowest levels in generations, reflecting market gloom about the economy and also possibly the anticipation of more action by the Fed. Bond-buying programs are meant to push down long-term interest rates to spur spending and investment and to drive investors into riskier assets that might support economic growth, such as stocks.

US Set for Earnings Roadblock as Growth Falters (Financial Times)

US manufacturers are set to report their slowest growth in earnings since 2009, hit by the European crisis and a slowdown in emerging economies. Analysts are forecasting that industrial companies will fall well short of last year’s growth rates reported in the first quarter of 2012 despite being the fastest-growing sector in the US for second-quarter earnings, according to S&P Capital IQ. Manufacturing has been one of the brighter areas of the US economy, but last week the US Institute for Supply Management survey showed its weakest reading for the industry since July 2009. Scott Davis, an analyst at Barclays Capital, said: “We’ve hit a roadblock. Something happened in May that caused a real slowdown in spending.” US businesses were prepared for weak demand in Europe, but there have been recent signs that the region has been worse than expected, with confidence falling even in Germany, its strongest economy.

Brace Yourself, Real Estate Prices Are Going Back Up (Bloomberg)

House prices, after falling for more than five years, are rising again. All the major sales-price indexes show that there have been modest national increases in recent months, even after adjusting for seasonal patterns. When foreclosures and distressed sales are excluded from the data, prices are up even more. And we should expect further gains: The asking-price index, a leading indicator of sales prices, published by Trulia Inc. (where I work), climbed at an annualized rate of 3.3 percent in the second quarter of this year, adjusted for mix and seasonality, and rose in 84 of the 100 largest U.S. metropolitan areas. Of course, if the U.S. economy falters, due to a deepening of the economic crisis in Europe or a wave of foreclosures, prices may reverse. For now, though, the increases are widespread. For the real-estate market and housing policy, this is cause for relief, but also for some concern.


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Editorials & Opinions

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.

Why U.S. Economic Policy is Paralyzed (Robert Samuelson in The Washington Post)

Wondering why government can’t restart the sluggish economy? Well, one reason is that we are still paying the price for the greatest blunder in domestic policy since World War II. This occurred a half-century ago and helps explain today’s policy paralysis. The history — largely unrecognized — is worth recalling. Until the 1960s, Americans generally believed in low inflation and balanced budgets. President John Kennedy shared the consensus but was persuaded to change his mind. His economic advisers argued that, through deficit spending and modest increases in inflation, government could raise economic growth, lower unemployment and smooth business cycles. None of this proved true; all of it led to grief. Chapter One involved inflation. Increases weren’t modest; by 1980, they approached 14 percent annually. Business cycles weren’t smoothed; from 1969 to 1981, there weref our recessions. Unemployment, on average, didn’t fall; the peak monthly rate — reached in the savage 1980-82 slump — was 10.8 percent. Americans lost faith in government and the future, much as now. Confidence revived only after high inflation was quashed in the early 1980s.

America’s Stalling Recovery Crisis (Financial Times Editorial)

If the eurozone did not exist, the world would be focused on America’s recovery problem. The US is not on the brink of a potential downward spiral – at least not until Washington arrives at its self-imposed “fiscal cliff” later this year. But, by any measure, America is in the middle of a partially self-inflicted growth crisis. Since the politicians are part of the problem, all eyes are once again turning to the Federal Reserve. The Fed has been down this road before. Last month’s jobs report confirmed that the US recovery is stalling for the third year in a row. Having added 226,000 jobs a month in the first quarter of 2012, that has slipped to just 75,000 a month since March. Unemployment is likely to remain above 8 per cent until 2013. Growth is also slowing with many forecasters anticipating gross domestic product will be unlikely to exceed last year’s paltry 1.9 per cent. With long Treasury bond yields hovering at about 1.5 per cent, the case for fiscal stimulus is as strong as ever. Since 2009, state governments have shed more than 600,000 employees. Much of America’s infrastructure has continued to deteriorate. In normal business cycles it usually makes sense to pursue counter-cyclical fiscal policy. At these borrowing costs, the case for more federal stimulus is overwhelming.


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