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Monday, February 27, 2012

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Economic Events of the Week

Monday – Obama and Biden Deliver Remarks to the NGA, Pending Home Sales
Tuesday – Michigan and Arizon primaries
Wednesday – House Financial Services Committee Hearing on "Monetary Policy and the State of the Economy" with Ben Bernanke, Q4 GDP
Thursday – Personal Income
Saturday– Washington caucuses

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Story of the Day
The US Tax System Needs Rebuilding (Lawrence Summers in Financial Times)

Washington Update
Light Agenda Ahead After Transit Punt (National Journal)
Nancy Pelosi on Gasoline Prices (Cato at Liberty)

Market Talk
Private Employment Has Recouped Only Three-Eighths of Its Recent Loss (The Beacon)

Editorials & Opinions
My Economic Freedom Agenda (Rick Santorum in Wall Street Journal)
Bruce Bartlett’s Excellent Guide to Tax Reform (DMarron.com)
The Tax Debate America Needs (Financial Times Editorial)
For the Fed, There’s No Easy Exit (George Melloan in Wall Street Journal)

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Story of the Day

The US Tax System Needs Rebuilding (Lawrence Summers in Financial Times)

Whoever wins this year’s US election, the combined effect of three events – the expiry of former president George W. Bush’s tax cuts, a renewal of the legally binding limit on federal borrowing and the start of a Congressionally mandated sequester, a mechanism that will automatically cut domestic spending from 2013 – will force the president and Congress to engage deeply with fiscal issues. The decisions made will do much to determine the country’s future. For many observers, the central question in debates over deficit reduction is what can be done about entitlements. Growth in spending associated with an ageing population will be the major factor fuelling the growth of federal spending. Less discussed in the context of major deficit reduction is tax reform. For a variety of reasons, 2013 should be the year when the tax code is overhauled in a substantial way.


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Washington Update

Light Agenda Ahead After Transit Punt (National Journal)

After a relatively productive early-year spate of legislating, lawmakers return from a weeklong recess for what could be their last serious work period before election-year politics squash all but symbolic measures. Congress may already be effectively done until November, as few pending bills have high prospects of passing both chambers. A March 31 deadline looms to finish a surface-transportation reauthorization bill, but that effort took a hit last week when House Speaker John Boehner, R-Ohio, bowing to resistance from his conference, said he would scale back a five-year road, bridge, and transit construction bill. Boehner’s decision gives the upper hand to Senate Democrats, who hope by mid-March to pass a two-year, $109 billion measure that House Republicans have essentially ignored. With Boehner scaling back his ambitions, remaining options in both chambers are comparatively bite-sized and mundane. On the table: streamlining federal programs without changing funding levels and, if the Senate has its way, barely adjusting the state-by-state funding formulas.

Nancy Pelosi on Gasoline Prices (Cato at Liberty)

The congresswomen’s comments are so cartoonish, I don’t even have to comment on them. But I thought readers would like to know what the minority leader of the U.S. House is saying about rising gas prices. From a Nancy Pelosi press release today: “Independent reports confirm that speculators are driving up the cost of oil, hurting consumers and potentially damaging the economic recovery. Wall Street profiteering, not oil shortages, is the cause of the price spike. We need to take strong action to protect consumers from this speculation. Unfortunately, Republicans have chosen to protect the interests of Wall Street speculators and oil companies instead of the interests of working Americans by obstructing the agencies with the responsibility of enforcing consumer protection laws.”


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Market Talk

Private Employment Has Recouped Only Three-Eighths of Its Recent Loss (The Beacon)

As the most widely reported rate of unemployment (U-3) has fallen in recent months, people with a political agenda served by painting a rosy picture of the recovery have made considerable noise about this decrease. Their political opponents have responded that one reason for the decline is that the labor force has fallen as more people have given up looking for work. The best way to avoid the parsing and cherry-picking that plague such debates is to look not at unemployment, but at employment. The most recently reported data on private nonfarm employment, for January 2012, show that employment has indeed continued its recovery. Since reaching its current-recession trough about two years ago, it has increased by about 3 million persons. Before starting a celebration, however, we should recognize that private nonfarm employment is still about 5 million persons less than it was at its pre-recession peak in 2008.


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Editorials & Opinions

My Economic Freedom Agenda (Rick Santorum in Wall Street Journal)

America's budget process is broken. Our economy and American families are struggling, and the country needs bold reforms and major restructuring, not tinkering at the margins. Obamanomics has left one in six Americans in poverty, and one in four children on food stamps. Millions seek jobs and others have given up. Meanwhile, my opponent in the Republican primaries, Mitt Romney, had a last-minute conversion. Attempting to distract from his record of tax and fee increases as governor of Massachusetts, poor job creation, and aggressive pursuit of earmarks, he now says he wants to follow my lead and lower individual as well as corporate marginal tax rates. It's a good start. But it doesn't go nearly far enough.

Bruce Bartlett’s Excellent Guide to Tax Reform (DMarron.com)

Bruce Bartlett’s The Benefit and the Burden is an excellent guide to the promise and peril of tax reform. Beauty is too much to ask of any tax system, but order and functionality are fair aspirations. As Bruce documents, however, we fall far short. Our code is too complex, unfair, and economically harmful. And it doesn’t raise enough revenue to pay the government’s bills. Bruce takes readers on a tour of many crucial issues in designing a coherent tax system. How should we measure income? Should capital gains count? How should the tax burden vary with income? Are all tax cuts and increases created equal? What can we learn from other nations? Should we tax income or consumption? How should we think about the inevitable politics of choosing winners and losers? Bruce’s writing is clear, concise, and crisp.

The Tax Debate America Needs (Financial Times Editorial)

All of a sudden Washington is talking tax reform again. Last week’s release of tax reform plans by President Barack Obama and Republican contender Mitt Romney has raised hopes there could yet be a bipartisan middle ground after the general election. Both plans are flawed – Mr Romney’s in particular. But they share a welcome urge to broaden and simplify America’s tax base. Mr Obama’s plan gets two cheers. By reducing the headline corporate tax rate from 35 to 28 per cent and paying for it by eliminating “dozens” of loopholes, the White House plan would take the US tax system in the right direction. But it does not go far enough. And it remains suspiciously vague on the details – few of the doomed loopholes are spelt out. Those that are, such as exemptions enjoyed by the oil and gas sectors, would generate only small savings. It also suffers from a Clintonite impulse to tinker.

For the Fed, There’s No Easy Exit (George Melloan in Wall Street Journal)

There is no end in sight to the pressure on the Fed's balance sheet. The Fed has acquired over a half trillion dollars (net) of Treasury securities over the last 12 months. Its holdings are up to $1.665 trillion and it is financing some 40% of the deficit—which is now running at a $1.3 trillion annual rate and heading for another collision with the debt ceiling, possibly late this year. The Fed still holds $836 billion of suspect mortgage-backed securities on its books, bought mainly to bail out Fannie Mae, Freddie Mac and AIG. The Fed lists them at par (the remaining principal value of the underlying mortgages). But sales from the AIG tranche over the last year have shown their market worth to be somewhere around 50 cents on the dollar.


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