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Wednesday, January 18, 2012

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Economic Events of the Week

Wednesday – Producer Price Index, Industrial Production
Thursday – Consumer Price Index, Housing Starts, Jobless Claims, Philadelphia Fed Survey
Friday – Existing Home Sales

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e21 Reaction & Commentary
e21 Commentary: The Fed’s Pyrrhic Victory 
Jobs, Europe, and Geopolitics (Christopher Papagianis in New York Times)

Washington Update
Despite Hype, Payroll Tax Deal Remains Elusive (Congress Daily)
Romney Unveils Own Tax Income Rate: 15% (Wall Street Journal)
Jeffrey Zients Named White House Acting Budget Director (The Hill)

Market Talk
Jobs Boost Fuels Hope for US Industry (Financial Times)
World Bank Lowers Growth Forecast (Wall Street Journal)

Editorials & Opinions
Mitt Romney’s 15% (Wall Street Journal Editorial)
Congress is Back, and So Are It’s Battles Over Tax Policy (Howard Gleckman in TaxVox)
Great Recession Demands New Rules (Clive Crook in Bloomberg)

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e21 Reaction & Commentary

e21 Commentary: The Fed’s Pyrrhic Victory

Recent data suggest that the mini revival in domestic economic fortunes is largely attributable to an increase in household outlays. This would be good news if the increase was due to household income growth. But, the increase is instead the result of households spending more out of the same income. This questions the durability of the expansion, as declines in savings are hardly a sound foundation on which to build income growth. The economy’s ongoing dependence on consumer outlays also puts a focus on the policy objectives of those on the Federal Open Market Committee, like Federal Reserve Bank of New York President William Dudley, who wish to use the threat of accelerating inflation to increase household spending. The U.S. will never be able to transform itself from a consumption-dependent, net importer as long as the penalization of savings remains the preferred mechanism to generate short-term growth.

Jobs, Europe, and Geopolitics (Christopher Papagianis in New York Times)

While it’s difficult to forecast whether a discrete issue will present a policy or leadership opportunity rather than a vulnerability for the president or his challenger, there are three issues that merit particular attention: 1. The U.S. unemployment trend: Since 1960, four presidential elections have occurred when the unemployment rate was above 7 percent. Ronald Reagan won in 1984 when unemployment was 7.2 percent. In each of the other three elections (1976, 1980 and 1992), the incumbent party lost. Outlook: Bearish for Obama. 2. Europe on the brink: The economic outlook for Europe is poor and it’s likely to deteriorate further. The consensus view is that Europe already faces a recessionary environment in 2012. Outlook: Moderately bearish for Obama. 3. Geopolitical risks are climbing: Putting aside the Arab Spring, there are three other hot spots to watch in 2012. Outlook: Moderately bearish for G.O.P. front-runners.


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Washington Update

Despite Hype, Payroll Tax Deal Remains Elusive (Congress Daily)

Despite both parties’ hopes for a swift agreement on a yearlong extension of the payroll-tax holiday, Democrats’ certainty that their party holds a political advantage could hinder their chances at an easy deal. Just before Christmas, Congress passed a bill that extended the current 4.2 percent payroll-tax rate, federal unemployment insurance, and a pay fix for Medicare physicians for two months. Republican leaders, battered politically last month when they balked at—and then swallowed—the Senate’s two-month deal, are hoping to avoid a major fight this time around. Several members of the House Republican conference say House Majority Whip Kevin McCarthy, R-Calif., has already advised them that Speaker John Boehner, R-Ohio, and his leadership team have determined Republicans should not expend much more political capital on the payroll-tax battle.

Romney Unveils Own Tax Income Rate: 15% (Wall Street Journal)

Mitt Romney revealed Tuesday for the first time that his own effective income-tax rate has been in the neighborhood of 15% in recent years, reigniting a debate within the GOP presidential field over tax policy and putting a focus on the front-runner's wealth. Government figures show that Mr. Romney's tax bill is roughly in line with the rate paid by many higher-income households—most of whom receive investment income and dividends that are taxed at a top rate of 15%. "My income comes overwhelmingly from some investments made in the past," Mr. Romney told reporters during a campaign stop in Florence, S.C. Mr. Romney's disclosure underscores how taxpayers often benefit from various provisions that keep their effective income-tax rates well below official rates that top out at 35%. It also points to what is likely to be a central theme of the 2012 presidential race: What is an appropriate tax level for various income groups?

Jeffrey Zients Named White House Acting Budget Director (The Hill)

President Obama on Tuesday appointed Jeffrey Zients as acting director of the Office of Management and Budget (OMB). Zients replaces Jack Lew, who is leaving his post as budget director to become White House chief of staff.  “I’m pleased to designate Jeff Zients to lead the Office of Management and Budget. Since day one, Jeff has demonstrated superb judgment and has provided sound advice on a whole host of issues,” Obama said in a statement. “With decades of experience, Jeff has been a tremendous asset to our team and I’m confident in his ability to help us rebuild an economy where hard work and responsibility pay off and the middle class has a chance to get ahead.” By naming an acting director, Obama avoids a confirmation battle with the Senate this year.

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Market Talk

Jobs Boost Fuels Hope for US Industry (Financial Times)

Manufacturing employment has grown faster in the US than in any other leading developed economy since the start of the recovery, as productivity gains and subdued pay rises raise hopes for an American industrial renaissance. The US has added more net manufacturing jobs since the start of 2010 than the rest of the Group of 7 developed countries put together, with only two other economies, Germany and Canada, increasing factory employment at all. At 11.79m, employment in US manufacturing is still about 2m below its pre-recession levels. About 2.3m factory jobs were lost in 2007-09, and 328,000 jobs (seasonally adjusted) have been created since then. However, hopes are rising that the US is entering a sustained manufacturing revival.

World Bank Lowers Growth Forecast (Wall Street Journal)

The World Bank has revised downward its global growth forecast for 2012, acknowledging that the world is in a precarious position under threat of a Lehman-like crisis engulfing capital markets. The bank's latest global growth forecast for 2012 is 5.4% for developing countries, down from 6.2% previously projected, and 1.4% for high-income countries, from 2.7%. The bank's worst-case scenario—the freezing of financial-market access to up to four euro-zone countries—would cause growth to shrink even more. While the bank doesn't expect the worst case to come true, "we are examining the possibility that things could go worse," said Andrew Burns, manager of Global Macroeconomic Trends, a research arm of the World Bank. The purpose of the dire tone to the biannual Global Economics Prospects 2012 report is to assist developing countries in preparing for such possibilities, he said.


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Editorials & Opinions

Mitt Romney’s 15% (Wall Street Journal Editorial)

Mitt Romney hasn't yet made the case for lower, flatter tax rates as a boon to economic growth, but perhaps he'll be inspired by the power of his own example. In South Carolina yesterday the former Massachusetts Governor said his effective tax rate is "probably closer to the 15% rate than anything." Let the mayhem begin. Mr. Romney said this week that he'd release his 2011 tax return in April, at which point you can expect Team Obama to howl like Occupy Wall Streeters and demand that people like Mr. Romney pay higher tax rates. Rather than play his usual defense by saying he doesn't favor cutting taxes on anyone making more than $200,000, Mr. Romney could use the opportunity to make the moral and practical case for lower rates and fewer loopholes.

Congress is Back, and So Are It’s Battles Over Tax Policy (Howard Gleckman in TaxVox)

The least popular Congress in memory is back.  I, personally, am thrilled. After a year in which lawmakers did almost nothing besides (barely) keeping the government running, this session promises hardly more.  Tax policy will be at the center of much of the partisan squabbling, but it is hard to imagine Congress achieving more than a temporary truce in its ongoing battle over last year’s unfinished business. That skirmishing starts with the 2011 payroll tax cut which, after a bruising battle last December, Congress extended only to the end of February. It also includes about four dozen other temporary tax cuts that expired last December 31. On the spending side, lawmakers must resolve controversies over extended unemployment benefits and Medicare physician payments—the so-called “doc fix”– that also must be addressed by March. But all that will just be a warm up for what promises to be an awful year-end when lame-duck lawmakers will face their own version of an ugly triple witching hour.

Great Recession Demands New Rules (Clive Crook in Bloomberg)

Abolishing the greenback seems unlikely any time soon, and few politicians would advocate a policy of higher inflation. For now, the only remaining choice is to do what the Fed has done: improvise and dissemble. Undertake quantitative easing (explicit or disguised) and other enormous quasi-fiscal interventions, acting throughout as though such measures fall within the proper scope of central-bank independence. Better fiscal policy by the elected governments authorized to undertake it would lift some of the burden from central banks and surely help, but in the recent emergency most governments proved unequal to this challenge. “Good fiscal policy” may be as remote a prospect as “physical currency abolition.” In the U.S., the Fed had to act because after TARP and the stimulus of 2009, Congress no longer would. Faced with paralyzed politicians, Europe’s central bank has been more cautious, and the European Union teeters on the edge of another recession as a result. What the Fed did was not “monetary policy,” but until something better comes along, it will have to do.


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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.

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