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Wednesday, January 25, 2012

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Economic Events of the Week

Wednesday Obama Delivers Remarks on Manufacturing in Cedar Rapids, IA, and in Chandler, AZ, FOMC Meeting Announcement
Thursday – Durable Goods Orders, Jobless Claims, New Home Sales
Friday – GDP

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e21 Reaction & Commentary
e21 Commentary: Populist Rhetoric Does Not A Plan Make (James C. Capretta)

Washington Update
Obama Says Nation Must Address Inequality (Washington Post)
Obama Answers Bernanke Housing Pleas (Bloomberg)
The European Crisis Deepens (Peterson Institute for International Economics)

Market Talk
United Welfare States of America: Nearly Half Population Receive Govt Benefit (Zero Hedge)
Fed Thoughts: The End of History? (Morgan Stanley)

Editorials & Opinions
Economics for the Long Run (John Taylor in Wall Street Journal)
President Obama’s Decision to Waste (At Least) $60 Billion (KeithHennessey.com)
Give Entrepreneurs Room and They Will Grow the Economy (Steve Case in Washington Post)

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e21 Reaction & Commentary

e21 Commentary: Populist Rhetoric Does Not A Plan Make (James C. Capretta)

So, it was no real surprise that during last night’s state of the union address, the president hit on the same populist themes he has been pounding since Labor Day, which essentially come down to this: the nation’s economic troubles -- anemic job growth today, massive federal borrowing and debt accumulation, and stagnant wage growth for the middle class -- can all be traced to public policies which deliver excessive economic gains to the rich at the expense of everyone else. In other words, if only the Republicans were willing to tax the rich, all would be well. There’s no question that the president’s populist, tax-the-rich rhetoric resonates with a segment of the electorate that has struggled economically and is all-too-willing to accept the simplistic explanation that the blame for their troubles lies with the so-called “rich.” But what President Obama didn’t explain last evening -- indeed, has never really explained -- is how a tax hike on higher income households will help the struggling middle class. Because it’s not at all obvious it would.


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Washington Update

Obama Says Nation Must Address Inequality (Washington Post)

President Obama warned the nation Tuesday that the decades-old promise of a secure and rising middle class is under threat because of growing disparities between the rich and everyone else in America. In an election-year State of the Union message that will likely serve as the template for the months of campaigning ahead, Obama outlined a series of steps that he believes will reinforce the tentative economic recovery, including proposals to eliminate tax incentives for companies to move jobs overseas, to make college more affordable and to expand help for credit-worthy homeowners looking to refinance mortgages at historically low interest rates. None of the proposals constitutes a single bold stroke to revive the economy, but the heart of Obama’s message — one he has underscored in appearances around the country in recent months — was that America’s wealthiest citizens must do more to cement the economic recovery and pull the country from its dire fiscal condition.

Obama Answers Bernanke Housing Pleas (Bloomberg)

President Barack Obama answered Ben S. Bernanke’s appeal for more action to fix the U.S. housing market that’s restraining the economic recovery by proposing a plan to help borrowers reduce their monthly mortgage payments. Obama is sending Congress legislation that would allow homeowners to tap record-low borrowing costs, potentially boosting housing as he seeks re-election this year. The proposal could save participants about $3,000 a year, Obama said in his State of the Union speech to Congress. Even with unemployment at the lowest level since February 2009 and housing sales increasing, homeowners have been blocked from refinancing by house prices that are 32 percent below their 2006 peak and tightened bank lending.

The European Crisis Deepens (Peterson Institute for International Economics)

Successive plans to restore confidence in the euro area have failed. Proposals currently on the table also seem likely to fail. The market cost of borrowing is at unsustainable levels for many banks and a significant number of governments that share the euro. Two major problems loom over the euro area. First, the introduction of sovereign credit risk has made nations and subsequently banks effectively insolvent unless they receive large-scale bailouts. Second, the ensuing credit crunch has exacerbated difficulties in the real economy, causing Europe’s periphery to plunge into recession. This has increased the financing needs of troubled nations well into the future.  With governments reaching their presumed debt limits, some commentators are calling on the European Central Bank (ECB) to bear the costs of additional bailouts. The ECB is now treading a dangerous path. It feels compelled to provide adequate “liquidity” to avert systemic financial collapse, yet must presumably limit its activities in order to prevent a loss of confidence in the euro—i.e., a change in market and political sentiment that could lead to a rapid breakup of the euro area.


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Market Talk

United Welfare States of America: Nearly Half Population Receive Govt Benefit (Zero Hedge)

While politicians may debate whether or not America is the most "generous" (with other generations' money of course) state in the history of mankind, the undoctored numbers make the affirmative case quite clear and without any chance for confusion. The single most disturbing statistic: in 2011 nearly half of the population lived in a household that receives some form of government benefit, which in turn accounted for 65% of total federal spending, or $2.5 trillion, and amount to 15% of GDP. Something tells us that there will be a peculiar overlap between this 50% and the 50% of Americans that pay zero taxes.

Fed Thoughts: The End of History? (Morgan Stanley)

A new chapter in the history of Federal Reserve communications policies will open at the policy-setting meeting on January 24-25.  As promised in the minutes of the December meeting, all FOMC participants will now include their expectations for the appropriate level of the fed funds rate corresponding to their economic projections.  They each will also indicate the date at which they expect to start raising the policy rate.  In addition, news reports strongly suggest that the Fed will issue a statement of its longer-run goals and policy strategy. The move to release more information about the path of interest rates is the compromise that we expected.  Fed officials are too disputatious to agree to a simple description of their policy setting, so they settled on reporting what they expect to do.  By this logic, though, agreement on a mission statement would come as more of a surprise.  If Fed officials agree on such a description of policy strategy at the upcoming meeting, then its drafters are likely to have pitched a very large tent to encompass the wide span of views on critical issues among FOMC participants.


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Editorials & Opinions

Economics for the Long Run (John Taylor in Wall Street Journal)

As this election year begins, a lot of people are wondering what we can do to restore America's prosperity and create more jobs. Republican presidential candidates are offering their ideas, and at his State of the Union message on Tuesday President Obama presented his. I believe the fundamental answer is simple: Government policies must adhere more closely to the principles of economic freedom upon which the country was founded. At their most basic level, these principles are that families, individuals and entrepreneurs must be free to decide what to produce, what to consume, what to buy and sell, and how to help others. Their decisions are to be made within a predictable government policy framework based on the rule of law, with strong incentives derived from the market system, and with a clearly limited role for government.

President Obama’s Decision to Waste (At Least) $60 Billion (KeithHennessey.com)

The New Yorker’s Ryan Lizza published an analysis of President Obama’s first two years of decision-making on economic policy. Mr. Lizza also released a 57 page memo sent to President-elect Obama by Dr. Larry Summers (later NEC Director) on December 15, 2008. Mr. Lizza reports that the memo contained input from Dr. Christina Romer (later CEA chair) and Dr. Peter Orszag (later OMB Director). Together the memo and article provide insight into the formerly private thinking of President Obama and his advisors. Their approach to fiscal policy is quite different from my own, most especially the confidence they express in their estimates of the effectiveness of government spending to accelerate economic growth. Even more interesting is that given this approach to economic policy, the memo and story describe a President who chose to ignore his policy advisors and to waste tens of billions of dollars of taxpayer money so he could have an inspiring talking point and help his partisan Congressional allies get their pork.

Give Entrepreneurs Room and They Will Grow the Economy (Steve Case in Washington Post)

After President Obama delivers his State of the Union address Tuesday, pundits will prognosticate that despite any bold plans unveiled, the critical task of spurring economic growth and job creation will be deferred until after Election Day. Forecasting Washington gridlock is a safe bet after months of political standoffs on nearly every issue. Despite all the discord, however, momentum is building behind a policy aim every American can support: jump-starting job creation by improving the environment for entrepreneurs to start companies and expand existing businesses. As a member of President Obama’s Council on Jobs & Competitiveness, I have led the effort to identify policies that can accelerate the creation and expansion of high-growth businesses — think Facebook, Chipotle and UnderArmour. Research by the Kauffman Foundation indicates that firms less than five years old have produced 40 million American jobs over the past three decades — accounting for all of the net new jobs created in that period.


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