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February 24, 2012

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Economic Events of the Week

Friday – Consumer Sentiment, New Home Sales

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e21 Reaction & Commentary
e21 Commentary: A Dangerous Combination: Financial Market Innovation and the Suppression of Market Forces
e21 Reaction: White House Now Targeting Corporate Taxes

Washington Update
Playing Favorites in the Corporate Tax Code (DMarron.com)
Why Obama’s Tax Plan Is a Total Bust (James Pethokoukis in The American)
The Inconsistencies of the Obama Corporate Tax Plan (Josh Barro in Manhattan Institute)

Market Talk
Growth and Inflation (The Economist)
How Real Wage Increases Have Been Understated (EconLog)

Editorials & Opinions
America is Europe (David Brooks in New York Times)
The Elderly Should Share the Burden (Robert Samuelson in Washington Post)

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e21 Reaction & Commentary

e21 Commentary: A Dangerous Combination: Financial Market Innovation and the Suppression of Market Forces

One of the most fundamental problems with the Dodd-Frank Act is its unreasonable degree of confidence in regulators’ ability to balance the competing societal goals of innovation and stability. The law itself was over 2,300 pages, but this was just the tip of the iceberg. Since the law does not specify new regulations so much as authorizes regulators to promulgate new rules, the law has actually spurred thousands of additional pages in the form of regulatory proposals. The most recent example is the “Volcker Rule,” which spurred hundreds of pages of additional regulations and is in the final stages of public comment and implementation. The rationale for the Volcker Rule, the 243 additional pages on risk retention requirements, and the hundreds of pages of regulations devoted to new FDIC resolution authority and “living wills” is simple: large, complex financial institutions proved during 2008 to generate more risk than the economy could reasonably tolerate. In turn, the Obama Administration believed that a new, more muscular regulatory regime was required. The problem is that the Dodd-Frank Act inserts the judgment of regulators for normal market processes or functions. The result is that regulators have the unenviable and nearly impossible task of deciding the manner and terms on which credit is supplied to the nonfinancial economy.

e21 Reaction: White House Now Targeting Corporate Taxes

The White House’s intent to increase taxes on investment income, transmitted in the recently released President’s Budget Request, has been identified as a threat to a still recovering American economy. However, it seems now that corporate tax reform may pose risks as well. The corporate tax reform plan released this week by President Obama and soon to be former Treasury Secretary Geithner uses the bipartisan concept of broadening the base and lowering the rate to mask a large increase in revenue destined to foot the bill on unreformed spending and the White House’s shift towards mercantilism going into the election. Details of the plan are fairly straightforward, however the ramifications of some of the strange proposals made in the plan are continuing to be analyzed. Here is a rundown of some others' recent thoughts on the plan’s shortcomings.


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Washington Update

Playing Favorites in the Corporate Tax Code (DMarron.com)

The President’s new Framework for Business Tax Reform is two documents in one. The first diagnoses the many flaws in America’s business tax system, and the second offers a framework for fixing them. Much of the resulting commentary has focused on the policy recommendations. But I’d like to give a shout out to the diagnosis. The White House and Treasury have done an outstanding job of documenting the problems in our business tax system. As the Framework notes, our corporate tax system pairs a high statutory tax rate with numerous tax subsidies, loopholes, and tax planning opportunities. Our 39.2 percent corporate tax rate (including state and local taxes) is the second-highest in the developed world, and will take over the lead in April when Japan cuts its rate. But our tax breaks are more generous than the norm.

Why Obama’s Tax Plan Is a Total Bust (James Pethokoukis in The American)

The current U.S. economic recovery is arguably the worst in modern American history. Incomes are flat, housing is moribund, and the past three years have seen the longest stretch of high unemployment in this country since the Great Depression. Yet President Barack Obama—with the backing of Treasury Secretary Timothy Geithner—has the temerity to propose a corporate tax reform plan that would actually raise the tax burden on American business by $250 billion over a decade (and de facto on workers, too) without lowering rates to an internationally competitive level. This is a terrible, terrible plan. The Obama-Geithner plan would lower the statutory corporate tax rate to 28 percent from 35 percent, currently the second-highest among advanced economies. But that would still leave the combined U.S. corporate tax rate—state and federal—at 32.2 percent, far above the OECD combined average of 25 percent. The U.S. combined rate would be a bit below slow-growing Japan and France but above the U.K. and Germany. That’s not nearly good enough. Canada just lowered its corporate tax rate, for instance, to 15 percent.

The Inconsistencies of the Obama Corporate Tax Plan (Josh Barro in Manhattan Institute)

President Obama’s corporate tax reform plan starts with a few, broad principles—the corporate tax should have a lower rate and a broader base, and should cause fewer distortions between different kinds of economic activities. These are good principles; for the most part, the plan sticks to them. In some components, though, the plan goes astray, creating or expanding tax preferences and introducing new distortions. Particularly, it prefers manufacturing over other sectors, renewable energy over other energy sources, and certain multinational structures over others. These are all deviations from the goal of tax neutrality, and they are all negative features of the plan.


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Market Talk

Growth and Inflation (The Economist)

There are few serious inflation pressures emerging from within the American economy. Rents are rising, contributing to higher measured inflation, but absent a broader wage-price cycle this is best understood as a useful shift in relative prices, essentially signaling to markets that they ought to employ workers to build homes. Given the historical shortfall in housing construction over the past going-on six years, that's a healthy thing. There are external inflation pressures, however, and the one that's generating the most ink is the rising price of oil. Lest we get ourselves confused, this is not due to an overheating American economy. American petroleum consumption has undergone a dramatic and seemingly secular decline since 2005. That drop in demand has not been great enough to offset the rise in consumption in rapidly growing emerging markets.

How Real Wage Increases Have Been Understated (EconLog)

Over the years, in discussing the alleged decline in real U.S. median wages, I've pointed out that there are two important ways in which the growth in real wages has been understated: (1) The inflation adjustment used to compare wages over time is the Consumer Price Index. As Michael Boskin has shown, the CPI overstates the increase in the cost of living. (2) The wage data typically exclude non-monetary benefits, one of the main ones of which is health insurance. Of course, health insurance has been getting more expensive but one reason is that we're getting more for it. But I had an interesting conversation with one of my favorite liberal economists ("liberal" in the statist sense of that word), Ken Judd, at Hoover a couple of weeks ago. Ken grew up on a farm in Wisconsin and worked 7 days a week from a fairly early age: milking cows, etc. This was in all types of weather: cold, heat, rain, snow, etc. But now, he pointed out, so many jobs are so much more comfortable: workers in manufacturing plants who have air conditioning, etc. This, he noted, is an increase in real wages. Moreover, there's been a secular decline in fatality rates on most jobs. That doesn't get captured in wage data. In fact, all else equal, wages are lower when jobs get safer.


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Editorials & Opinions

America is Europe (David Brooks in New York Times)

We Americans cherish our myths. One myth is that there is more social mobility in the United States than in Europe. That’s false. Another myth is that the government is smaller here than in Europe. That’s largely false, too. The U.S. does not have a significantly smaller welfare state than the European nations. We’re just better at hiding it. The Europeans provide welfare provisions through direct government payments. We do it through the back door via tax breaks. For example, in Europe, governments offer health care directly. In the U.S., we give employers a gigantic tax exemption to do the same thing. European governments offer public childcare. In the U.S., we have child tax credits. In Europe, governments subsidize favored industries. We do the same thing by providing special tax deductions and exemptions for everybody from ethanol producers to Nascar track owners.

The Elderly Should Share the Burden (Robert Samuelson in Washington Post)

One hallmark of the Obama administration’s budget policy has been to exempt the elderly from major cuts, even though spending on the elderly — mainly through Social Security, Medicare and Medicaid — represents 40 percent or more of the budget. The main reason is political: The elderly (it’s presumed) would vote against politicians who would cut their benefits. But to justify the policy, politicians and others often portray the elderly as financially vulnerable with scant savings. Surprise: It’s not true. Yes, the poorest 50 percent of the elderly have little savings; but above the midpoint, savings rise sharply and — including the present value of Social Security — average more than $2 million for the richest 10 percent of the elderly. Don’t take it from me. This information comes from President Obama’s top economists.


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