dashed-line

Monday, January 7, 2013

dashed-line
Economic Events of the Week

Wednesday – EIA Petroleum Status Update
Thursday – Jobless Claims
Friday – International Trade

dashed-line
Story of the Day
In Defense of the Fed's New Interest-Rate Policy (Mishkin & Woodford in The Wall Street Journal)

Washington Update
Peterson Pushes Boehner For Farm Bill Vote (Politico)
Mitch McConnell: The ‘Tax Issue Is Behind Us’ (The Washington Post)
Sequester Agreement Could Raise Domestic Spending This Year (CQ)
Obama May Have Passed Up Nearly $250 Billion in Tax Savings (National Journal)

Market Talk
Plosser Says Fed Must Defend 2% Explicit Target for Inflation (Bloomberg)
Debating Whether Economy's Best Years Are Behind It (The Wall Street Journal)

Editorials & Opinions
The Stealth Tax Hike (The Wall Street Journal)
Repairs To Medicare (The Washington Post Editorial)
US Joins Misguided Pursuit Of Austerity (Wolfgang Munchau in Financial Times)

dashed-line

Story of the Day

In Defense of the Fed's New Interest-Rate Policy (Mishkin & Woodford in The Wall Street Journal)

At the most recent meeting of its Federal Open Market Committee, the Federal Reserve broke new ground by announcing the explicit criteria it would use to begin raising its target for the federal-funds rate. The FOMC said it will keep the rate near zero as long as the unemployment rate remains above 6.5%, and the inflation rate one to two years ahead is projected to be no higher than 2.5%. The Fed's increased clarity about its intentions is highly desirable. This is especially so now, when the current funds-rate target cannot be further lowered, yet aggregate demand remains insufficient. A commitment not to raise rates in the future as soon as might have been expected is an obvious way the FOMC can loosen current financial conditions. Yet the new approach has downsides that the Fed needs to address. Providing policy criteria to the public is a significant improvement over the Fed's previous guidance to markets—in which the FOMC stated that near-zero rates were "likely to be warranted at least through mid-2015." Pledging to keep rates unchanged for more than two years, regardless of what happens in the meantime, would be reckless—and of course was not what the central bank intended. But date-based guidance runs the risk that announcement of a distant date will be taken to indicate that the Fed has pessimistic information about the economy's future prospects. This gives households and firms a reason to sit on their cash rather than spend or invest it—which will hold the economy back.


arrow Back to Top dashed-line

Washington Update

Peterson Pushes Boehner For Farm Bill Vote (Politico)

The top House Democrat on agriculture issues said Friday that it would be a “fool’s errand” to try to resurrect a five-year farm bill in the new 113th Congress if there no promise of fairer treatment by the Republican leadership than the agricultural committees received in the 112th. Minnesota Rep. Collin Peterson made his comments in a bluntly-written letter to Speaker John Boehner (R-Ohio) that vents all the frustration of past year in which the GOP leadership refused to bring a comprehensive farm bill to the floor. House Agriculture Committee Chairman Frank Lucas (R-Okla.) is already proposing to start anew with a farm bill markup in late February. And his Senate counterpart, Chairwoman Debbie Stabenow (D-Mich.), who passed hers in the Senate last June, has said the same. But before that date, Peterson wants some clear promise from Boehner and Majority Leader Eric Cantor (R-Va.) that time will be allotted for House debate.

Mitch McConnell: The ‘Tax Issue Is Behind Us’ (The Washington Post)

With looming deadlines on the nation’s federal borrowing limit and delayed across-the-board budget cuts, Senate Minority Leader Mitch McConnell (R-Ky.) said Sunday that discussions about new taxes are off the table in upcoming fiscal debate, and that reining in government spending must be the focal point. “Are you saying that any discussion of revenue is completely off the table going forward? You will not accept any new revenues in any new deal?” asked ABC News’s George Stephanopoulos on his program, “This Week.”  “Yeah, absolutely,” McConnell said. “ The tax issue is behind us. Now, the question is what are we going to do about the real problem. … Now it’s time to pivot and turn to the real issue, which is our spending addiction.”

Sequester Agreement Could Raise Domestic Spending This Year (CQ)

Domestic spending in fiscal 2013 could be bumped up slightly under new budget caps for discretionary spending as part of this week’s fiscal-cliff deal. The American Taxpayer Relief Act of 2012 replaces prior defense and non-defense spending caps with security and non-security caps, a shift that creates greater flexibility for spreading the reductions across federal programs. Because the non-security cap is about $3 billion higher than what is contemplated to be spent on domestic programs in the current stopgap spending bill appropriators may put more into domestic spending while making some cuts to defense and international programs. Any increases to domestic spending would depend on lawmakers finding a way to prevent or replace the $109 billion sequester, which the new law delays until March 1.

Obama May Have Passed Up Nearly $250 Billion in Tax Savings (National Journal)

President Obama didn't just back away from a campaign promise when he relented to GOP demands to cut taxes for more upper-income Americans this week. He may also have passed up hundreds of billions of dollars in savings. After years of insisting that lawmakers raise taxes on families earning more than $250,000—and months wrestling with congressional Republicans over a deal—Obama agreed to use a $450,000 cutoff instead for joint filing. In compromising, he may have given up approximately $200 billion to $250 billion in savings over the next decade, according to a rough estimate based on Joint Committee on Taxation analyses. JCT, the nonpartisan congressional scorekeeper, hasn’t officially estimated the cost difference between raising taxes at the two income levels. But several tax experts, including former JCT Chief of Staff Edward Kleinbard, said that one can get a rough figure by comparing portions of the JCT’s analyses of the budget proposal the president released in March, which sought to raise taxes on income over $250,000, and the fiscal-cliff deal reached on New Year's Day. The estimated range is in line with the $230 billion difference between White House estimates of the revenue raised by the final deal and the amount saved using Obama’s approach.


arrow Back to Top dashed-line

Market Talk

Plosser Says Fed Must Defend 2% Explicit Target for Inflation (Bloomberg)

Federal Reserve Bank of Philadelphia President Charles Plosser said the central bank should take the steps necessary to ensure inflation stays near its goal of 2 percent. “It is important that the Fed credibly commit to defending that target either on the upside or the downside,” Plosser said today to a meeting of economists in San Diego. “Right now, it would not be good either for our credibility or for the economy for us to have deflation. For the Fed at this point, we have established a target and we need to defend that target.” The central bank’s preferred measure of inflation, the personal consumption expenditures index excluding food and energy, rose 1.5 percent in November from a year earlier. The broader consumer price index gained 1.8 percent, the Labor Department said on Dec. 14. At the same time, “small but steady deflation is not something that we should necessarily be terrified of,” Plosser said to the American Economic Association’s annual meeting. While Japan has suffered from falling prices in recent years, that is not the country’s main economic obstacle, he said.

Debating Whether Economy's Best Years Are Behind It (The Wall Street Journal)

After three years of anemic growth, the U.S. economy is confronting the nagging question of whether its best years are behind it. Economists have long worried that an aging population and rising health-care costs could crimp growth in the 21st century. Now a host of other problems—including a still-fragile banking system, growing income inequality, lagging education levels and excessive government debt—are making the problem worse, said several economists gathered here for the annual meeting of the American Economic Association. From 1950 through the end of 1999, the economy grew at an average annual rate of 3.6%, according to Commerce Department data. Since 2000, it has grown at less than 2% per year. Similarly, the unemployment rate averaged 5.7% between 1950 and 1999, versus 6.3% since 2000. The latest snapshot of the U.S. job market, out Friday, showed the economy added just over 150,000 jobs in December, around the monthly average of the past two years, and not enough to nudge unemployment down from 7.8% in November.


arrow Back to Top dashed-line

Editorials & Opinions

The Stealth Tax Hike (The Wall Street Journal)

Anyone still need a reason to abandon "grand bargains" and deals negotiated between this President and GOP Congressional leaders? Here it is: The revival of two dormant provisions of the tax code means the much ballyhooed $450,000 income threshold for the highest tax rate is largely fake.  The two provisions are the infamous PEP and Pease, which aficionados of stealth tax increases will recognize immediately as relics of the 1990 tax increase. Those measures, which limit deductions and exemptions for higher-income taxpayers, expired in 2010. The Obama tax bill revived them this week. It isn't going to be pretty. Under the new law, some of the steepest tax increases may fall on upper-middle class earners with incomes just above $250,000.

Repairs To Medicare (The Washington Post Editorial)

On New Year’s Day, President Obama looked ahead to the post-“fiscal cliff” deficit-reduction battles and declared: “I agree with Democrats and Republicans that the aging population and the rising cost of health care . . . [make] Medicare the biggest contributor to our deficit. I believe we’ve got to find ways to reform that program without hurting seniors who count on it to survive.” The question — a tricky one for a president who won reelection in part by defending “Medicare as we know it” — is how to accomplish this feat. Medicare as we know it is not sustainable. Medicare cost $555 billion in 2012, according to the Congressional Budget Office. The CBO has projected that this number, already 15 percent of non-interest federal spending, will nearly double by 2022. Medicare’s trustees estimate that the hospital insurance fund supported by the payroll tax will run out of cash by 2024, but this is mainly a symbolic threat: The government will draw on general revenue to keep Medicare going. The real threat is that Medicare spending will crowd out other necessary federal endeavors, forcing undesirable cuts, substantially higher taxes, unsustainable borrowing — or some combination of the three.

US Joins Misguided Pursuit Of Austerity (Wolfgang Munchau in Financial Times)

Looking at the US fiscal standoff from Europe, it all looks eerily familiar. The US has become very European. But for me the main problem is not an inability to deal with the deficit, as the Economist argued in its latest cover story, but rather the contrary. I fear that the US is blindly rushing into semi-automated austerity, which is exactly the mistake we have made in Europe. The problem, in other words, is not the size of the national debt as such, which is manageable in both cases, but our policies in dealing with it. The various measures in last week’s US budget deal imply revenue increases in the order of roughly 2 per cent gross domestic product. This is the absolute size of the agreed measures. It does not include any further spending cuts that may, or may not, come as part of an agreement on a debt ceiling. The gross fiscal contraction of the US will be larger than the UK’s in 2013, though not as large as Spain, Portugal or Greece. Still, this would still make the US an honorary member of the European austerity club.


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