Wednesday, March 10, 2010

Economic Events of the Week

Wednesday March 10 - Wholesale Trade, Regional and State Employment and Unemployment, Treasury Statement
Thursday March 11 - Initial Claims Weekly, Trade Balance
Friday March 12 - Advance Retail Sales, Business Inventories, European Union Trade Commissioner begins three day visit to Washington to seek progress on the Doha round of talks

Front Page News
Senate Clears Hurdle to Aiding Unemployed (Wall Street Journal)

Washington Update
On Health Care Reform, Republicans Target Democrats' Division Over Reconciliation (Washington Post)

Financial Markets News
Monthly Economic Outlook (Wells Fargo)
Okun's Law and the Unemployment Surprise of 2009 (Federal Reserve Bank of San Francisco)
V, U, and W (Roubini Global Economics)

Editorials and Commentaries
How to Head Off a Health Reform Bloodbath (Zogby in Financial Times)
Why Obama Can't Move the Health Care Numbers (Rasmussen in Wall Street Journal)
Inside Man: A Review of Hank Paulson's Book (Johnson in The New Republic)

Front Page News

Senate Clears Hurdle to Aiding Unemployed (Wall Street Journal)

The Senate on Tuesday cleared a hurdle to extending unemployment benefits and health-care subsidies for the jobless until year's end, the latest modest bipartisan success on jobs and the economy. The vote was 66-34, with eight Republicans, including newly-elected Sen. Scott Brown of Massachusetts, joining the Democrats. One Democrat, Sen. Ben Nelson of Nebraska, voted against the measure. The Senate bill extends eligibility for enhanced unemployment-insurance benefits and eligibility for tax credits for laid off workers who obtain health insurance through the Cobra program, both through year's end.

After multiple extensions of unemployment benefits by the federal government workers can now collect payments for as long as 99 weeks -- the longest period since the program's inception. In response, the Washington Post asks "are unemployment benefits no longer temporary?" How do these generous unemployment benefits effect employment? On his blog, Krugman argues that although unemployment benefits raise structural unemployment in the long-term they increase employment in our current economic conditions by filling a gap in demand. David Henderson at EconLog responds to Krugman by citing Larry Summers, concluding that unemployment benefits do increase unemployment even under severe economic conditions.

Washington Update

On Health Care Reform, Republicans Target Democrats' Division Over Reconciliation (Washington Post)

Speaking to reporters Tuesday, Senate Minority Leader Mitch McConnell (R-Ky.) warned House Democrats that they would be taking a colossal risk if they approved the Senate's version of health-care legislation before the Senate had acted to remove some of the bill's most contentious provisions. Now that Democrats have lost their supermajority in the Senate, some variation of this delicate two-step process is the only way a health-care reform bill can become law. Moving the bill under reconciliation is appealing to Democrats because such legislation cannot be filibustered, although it would be vulnerable to parliamentary challenges. The sequence in which the Senate bill and the package of fixes would move is one of the key unresolved issues, much to the consternation of undecided House Democrats. They would prefer to pass the reconciliation bill first and force the Senate to accept their fixes before the House takes up the Senate bill.

For more procedural maneuvering, see Senate Republican Whip Jon Kyl's and House Republican Whip Eric Cantor's 5 page memo on the perils of using reconciliation. Kyle and Cantor warn House Democrats that they face "a scenario where House members vote on an unpopular issue that the Senate refuses to take up, resulting in a significant loss of House seats in the following election."

Financial Markets News

Monthly Economic Outlook (Wells Fargo)

We have updated our forecast with all of the most recent economic reports and our forecast remains remarkably similar to where it was one month ago. Real GDP is expected to rise at a 3.4 percent pace during the first quarter and grow 2.9 percent for all of 2010. The pace of economic activity is expected to moderate this spring, however, as some of the stimulus put in place to fight the financial crisis and recession begins to be wound down. We expect real GDP to expand at a 2.0 percent pace in both the second and third quarters of this year before gradually ramping back up toward the end of the year. Growth is expected to return to a 3 percent pace by the second half of 2011. While economic growth is expected to continue, the relatively slow pace of the recovery means that job growth will likely remain subdued and unemployment will likely remain relatively high.

Okun's Law and the Unemployment Surprise of 2009 (Federal Reserve Bank of San Francisco)

Economists have long known that the overall performance of the economy as measured by GDP has a direct bearing on unemployment. But the relationship between changes in output and changes in the unemployment rate deviated from expectations in 2009. Okun’s law tells us that, for every 2% that real GDP falls below its trend, we will see a 1% increase in the unemployment rate. Since real GDP was almost flat in 2009 while its trend level increased by 3%, the unemployment rate under Okun’s law should have increased by 1½ percentage points. Instead it rose by 3 percentage points, more than twice the predicted increase. We examine what might have disrupted the usually reliable empirical relationship described by Okun. Our results indicate that the main factor driving the unusual rise in unemployment relative to output was very rapid productivity growth, which allowed businesses to cut back sharply on labor while maintaining output levels.

V, U, and W (Roubini Global Economics)

Heated debate continues to rage in the United States on whether the economic recovery will be V-shaped (with a rapid return to robust growth above potential), U-shaped (slow anemic, sub-par, below trend growth for at least the next two years) or W-shaped (a double-dip recession). slew of poor economic data over the past two weeks suggests that the U.S. economy is headed for a U-shaped recovery—at best—in 2010. The macro news, including data on consumer confidence, home sales, construction and employment, actually suggests a significant downside risk even to the anemic levels of growth which RGE forecast for H1. The U.S. faces continued challenges in H2—particularly as historic levels of fiscal stimulus fade—and appears far too close to the tipping point of a double-dip recession.

Editorials and Commentaries

How to Head Off a Health Reform Bloodbath (Zogby in Financial Times)

In surveying American opinion just before and a week after President Barack Obama’s healthcare summit, we found a third of respondents more supportive of his plan, a third less so and a third unchanged. This would seem to confirm that the summit achieved nothing. But looking deeper into our March 3 data reveals some surprises. These may give second thoughts to those Republicans who want some type of health reform but are under orders to vote no on Obamacare. When we asked who was putting the nation’s interest ahead of political gain, we got a surprise: most independents – and almost half of Republicans – chose the Democrats.

Why Obama Can't Move the Health Care Numbers (Rasmussen in Wall Street Journal)

One of the more amazing aspects of the health-care debate is how steady public opinion has remained. Despite repeated and intense sales efforts by the president and his allies in Congress, most Americans consistently oppose the plan that has become the centerpiece of this legislative season. For every person who strongly favors it, two are strongly opposed. Why can't the president move the numbers? One reason may be that he keeps talking about details of the proposal while voters are looking at the issue in a broader context. Polling conducted earlier this week shows that 57% of voters believe that passage of the legislation would hurt the economy, while only 25% believe it would help.

Inside Man: A Review of Hank Paulson's Book (Johnson in The New Republic)

On the Brink is Paulson’s story, or at least a heavily vetted spin on his story. (He keeps no notes and never uses email—this is a smart guy.) The book focuses primarily on the period from September 2008 through the end of the Bush administration. Its author comes across in its pages as honest, overtaken by events, and swamped by odds beyond his control. But in reality he is a prime constructor of modern Wall Street, a man who worked long and hard—alongside his competitors—to bring you the risk-taking and crazy gambling of the 2000s.

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