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Monday, March 12, 2012

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Economic Events of the Week

Tuesday – Retail Sales, FOMC Meeting Announcement
Wednesday – Import and Export Prices
Thursday – Producer Price Index, Philadelphia Fed Survey
Friday – Consumer Price Index

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e21 Reaction & Commentary
e21 Commentary: Private Equity Experience a Plus for Government’s Loan Programs (Delisle and Papagianis)

Washington Update
In America, Power and Fuel are Separate Issues (KeithHennessey.com)
Does Obama Bear Responsibility for Increased Gas Prices? (EconLog)

Market Talk
Why Job Growth is Likely to Slow (Economix)
Greece’s CDS: More Lucky than Smart (Felix Salmon in Reuters)

Editorials & Opinions
Invisible Handouts (Reihan Salam in The Daily)
The Merits of a Corporate Tax Overhaul (Laura Tyson in Economix)
Obama’s Politicized Energy Policy (Bobby Jindal in Wall Street Journal)
US Starts on Long Road to Recovery (Financial Times Editorial)

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e21 Reaction & Commentary

e21 Commentary: Private Equity Experience a Plus for Government’s Loan Programs (Delisle and Papagianis)

The Republican presidential primary elections have sparked a show trial about whether a candidate’s experience as a private equity investor effectively disqualifies him to be the president of the United States. In this debate, private equity experience is linked to some of the industry’s failed investments, lay-offs at restructured companies, or lucrative distributions from successful investments. It is held up as an example of privilege, income inequality and evidence that private equity’s business model is anathema to the role or mission of the federal government. But there is at least one area where Washington is in desperate need of someone with private equity experience. “Only in Washington” accounting rules have helped fuel an explosion in the size of federal government’s loan programs, particularly those that subsidize housing. The rules make these programs appear to generate huge profits for the government, even though they make loans at below-market rates. Someone with private equity experience would be shocked to learn that loan programs appear profitable because official cost estimates systematically exclude the market risk taxpayers bear when the government guarantees loans or makes them directly. Click here for information on e21's bipartisan panel discussion of this issue on Capitol Hill Next week.


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Washington Update

In America, Power and Fuel are Separate Issues (KeithHennessey.com)

In his weekly address President Obama said: “But you and I both know that with only 2% of the world’s oil reserves, we can’t just drill our way to lower gas prices – not when consume 20 percent of the world’s oil. We need an all-of-the-above strategy that relies less on foreign oil and more on American-made energy – solar, wind, natural gas, biofuels, and more.” Solar, wind, and natural gas have almost nothing to do with the price of gasoline. In America there is little overlap between fuel used for transportation and electricity used to light, heat, and power our homes and businesses.  If you could magically make solar power price competitive with electricity produced from coal or natural gas you would do almost nothing to lower the price at the gas pump because there are so few electric-powered and hybrid vehicles on the road. Similarly the development of massive shale (natural) gas resources in the U.S. will make electricity more affordable in the U.S. but will have almost no effect on the cost of our transportation fuel.

Does Obama Bear Responsibility for Increased Gas Prices? (EconLog)

Cato Institute scholars Peter van Doren and Jerry Taylor write that President Obama is not responsible for the spiraling price of gasoline. They correctly blame the price increase on the increase in the price of oil. They focus on the increased price of North Sea oil. But oil is sold in a world market and the increase in the price of North Sea oil would not be sustainable if other producers did not also raise their prices. The main reason for the increased price of gasoline is the increased price of oil in the world market. So does Obama bear any responsibility for the increased price of oil in the world market? Yes. His saber rattling over Iran makes people nervous about war with Iran. A war with Iran would likely cut Iran's output. Because oil is so inelastically demanded, even a one million barrel per day (mbd) cut in output, in a 90 mbd market, would drive up the price by about 10%. Speculators, anticipating this, bid up the futures price.


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Market Talk

Why Job Growth is Likely to Slow (Economix)

If you looked only at the monthly jobs report, you could start getting pretty optimistic about the American economy. The largest, broadest survey of employment — a survey of businesses — shows the best job growth in more than five years over the last 12 months, with the pace mostly accelerating in recent months. The other survey that the Labor Department des — of households — shows even faster job growth, suggesting that the business survey may be understating the economy’s strength. But the jobs report isn’t the only measure of economic activity, and another major measure — of gross domestic product — doesn’t look quite so cheerful. The most likely situation is that job growth will slow in coming months, economists say, which will make President Obama’s economic narrative a bit more complicated than it now is.

Greece’s CDS: More Lucky than Smart (Felix Salmon in Reuters)

It’s official: “The International Swaps and Derivatives Association, Inc. today announced that its EMEA Credit Derivatives Determinations Committee resolved unanimously that a Restructuring Credit Event has occurred with respect to The Hellenic Republic (Greece).” The word that jumps out at me here is Restructuring. In Europe, restructuring counts as a credit event; in north America, by contrast, it doesn’t. Which means that the derivatives market was pretty lucky here. If the standard Greek CDS documentation had looked like the standard US CDS documentation, there wouldn’t have been a credit event. In other words, yes, the CDS market looks a little bit broken, but we’ll muddle through somehow, and hey, you never know, maybe the new bonds will work as deliverables after all.


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Editorials & Opinions

Invisible Handouts (Reihan Salam in The Daily)

Later this month, the Supreme Court will devote three days to hearing arguments about whether the Patient Protection and Affordable Care Act — the health care coverage expansion law better known as “Obamacare” — is constitutional. More specifically, the justices will be focusing on the law’s individual mandate, which requires that all individuals earning aobove a threshold income purchase insurance coverage that the federal government deems sufficiently comprehensive. Those who fail to do so are subject to a small fine. One of the more interesting aspects of the individual mandate is that it wasn’t the only way for the supporters of expanding insurance coverage to achieve their goal. An essentially identical result could have been achieved had Congress raised taxes to pay for a coverage expansion. Everyone acknowledges that Congress has the power “to lay and collect taxes” under the Constitution, after all. So why did the Obama administration and its allies choose to use a mandate to expand coverage rather than rely exclusively on tax increases? The most obvious interpretation is that it hoped to obscure the actual cost of coverage expansion.

The Merits of a Corporate Tax Overhaul (Laura Tyson in Economix)

Corporate tax reform is not usually a major issue in a presidential campaign, but it may be this year. President Obama has introduced a bold framework for a business tax overhaul. His framework is already under attack from both the left and the right, indicating that the president has found a sensible middle position from which to start the debate — a debate worth having. Corporate taxes are a significant determinant of investment, innovation, job opportunities and growth. When Japan cuts its corporate tax rate this year, the United States will have the highest statutory corporate tax rate of the developed countries. Even after incorporating various deductions, credits and other tax-reducing provisions in the tax code, the effective marginal corporate tax rate in the United States — the one that corporations actually pay on new investments — remains one of the highest in the world. In a world of mobile capital, corporate tax rates matter.

Obama’s Politicized Energy Policy (Bobby Jindal in Wall Street Journal)

With rising energy costs making it more expensive to drive our cars, heat our homes, and fuel our sputtering economy, many Republicans are criticizing the Obama administration for a failure to adopt a comprehensive energy policy. I believe that critique lets the president off too easily. His administration does have a national energy policy—it's just a subservient by-product of his radical environmental policy. This administration willfully ignores rational choices that would lower energy prices and reduce U.S. reliance on foreign energy sources. In 2011, the average annual prices of a barrel of oil and a gallon of gas were higher than at any time in the last 150 years. If we are going to be serious about rebuilding our economy and helping American families who are struggling to make ends meet, this president must take action.

US Starts on Long Road to Recovery (Financial Times Editorial)

When does a recovery become official? Last Friday, according to many economists, when the US created more than 200,000 new jobs for the third consecutive month. More than four years after the US entered the Great Recession, America’s labour market looks to be stirring into life again. The US private sector has created more than 2m jobs in the past year. That number would be higher still but for the fact the public sector continues to lay off employees, albeit at a slowing rate. There are even signs that those who had dropped out of the American labour force are beginning to trickle back into work, which is arguably a more important barometer than the official unemployment rate. Last month’s jobless rate stayed at 8.3 per cent precisely because America’s labour force participation rate inched upwards for the first time in years. In addition, the numbers were upwardly revised for December and January, showing an average gain in the past three months of 244,000 net new jobs a month. So has America finally turned the corner?


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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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