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Wednesday, April 11, 2012

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Economic Events of the Week

Wednesday – Import and Export Prices
Thursday – International Trade
Friday – Consumer Price Index

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Story of the Day
No, the Medicare Trustee's Report on Obamacare's Deficit Expansion Isn't 'Bogus' (Forbes)

Washington Update
White House Dismisses Claim of Health Care ‘Double Counting’ (CQ)
Obama Renews Push for Buffett Rule (Washington Post)

Market Talk
U.S. Job Openings Rose in February as Hiring Hit Three-Year High: Economy (Bloomberg)
Dealing with Debt (The Economist)
Analysis: Write-Downs Would Benefit Fannie, Freddie (Wall Street Journal)

Editorials & Opinions
The Volcker Rule Is Fatally Flawed (Peter Wallison in The Wall Street Journal)
The Austerity Question: ‘How’ Is As Important As ‘How Much’ (Alberto Alesina in voxEU)
Shadow Banking Out of the Shadows (Financial Times Editorial)

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Story of the Day

No, the Medicare Trustee's Report on Obamacare's Deficit Expansion Isn't 'Bogus' (Forbes)

The Congressional Budget Office has estimated that Obamacare will reduce the deficit, by coupling a multi-trillion-dollar expansion of federal health spending with cuts to Medicare and higher taxes. Now, a new study by a Medicare trustee suggests that the law will actually increase deficits, over the next ten years, by between $346 and $527 billion. Why do the trustee’s numbers differ from those of the CBO, and who’s right? Let’s take a look. Chuck Blahous, who was appointed by President Obama to be a public trustee of the Social Security and Medicare programs, published a study, under the aegis of the Mercatus Center of George Mason University. He makes two basic arguments: (1) the ACA’s cuts to Medicare should be counted as contributing to Medicare’s solvency, and can’t be redirected towards reducing the deficit; and (2) it’s likely that Congress will increase the law’s spending, and fail to enforce its spending cuts and tax increases, thereby worsening the law’s fiscal consequences.


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Washington Update

White House Dismisses Claim of Health Care ‘Double Counting’ (CQ)

The Obama administration disputed a study released Tuesday on the costs of the president’s signature health care law, denouncing as “new math” its assertion that the overhaul would add significantly to the federal deficit. The study, by a public trustee for the Medicare and Social Security programs, found that the 2010 law is expected to increase federal deficits by between $340 billion and $530 billion over 10 years, and to boost federal spending obligations by more than $1.15 trillion over the same period. Author Charles Blahous, a senior research fellow at the Mercatus Center at George Mason University and deputy director of President George W. Bush’s National Economic Council, said the accounting used by the Congressional Budget Office (CBO) and the Medicare trustees allows cost-savings provisions in the law effectively to be counted twice, preventing its fiscal impact from being “universally understood.” But the administration said official estimates agree that the overhaul will reduce the deficit.

Obama Renews Push for Buffett Rule (Washington Post)

President Obama on Tuesday renewed his public push for a “Buffett rule,” hoping that the proposal to raise taxes on millionaires will deepen distinctions with his political rivals in an election year, even if it has little chance to become law. Appearing before thousands of students at Florida Atlantic University, Obama urged the Senate to approve the Paying a Fair Share Act, which would require anyone earning at least $1 million a year to pay at least 30 percent of his income in taxes. The Senate is scheduled to vote Monday on the proposal, inspired by billionaire investor Warren Buffett, who has said it is unfair that he is able to use tax loopholes to pay a lower effective rate than his secretary. Although the legislation is probably doomed in the Republican-led House even if it succeeds in the Senate, the White House believes that the bill appeals to the public’s sense of economic fairness, a theme that Obama has sought to accentuate as he ramps up his reelection campaign in a sluggish economy.


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Market Talk

U.S. Job Openings Rose in February as Hiring Hit Three-Year High: Economy (Bloomberg)

Job openings in the U.S. increased in February and hiring climbed to the highest level in more than three years, signaling employers turned more optimistic about the economic outlook. The number of positions waiting to be filled totaled 3.5 million in February, up from a revised 3.48 million the prior month that was higher than previously estimated, the Labor Department said today in a statement posted on its website. More people were added to private payrolls than at any time since October 2008, while the pace of firings was little changed, the report showed. Better employment prospects may mean the setback in hiring in March will be short-lived, helping restore some of the 5 million jobs yet to be recovered in the aftermath of the 18- month recession that ended in June 2009.

Dealing with Debt (The Economist)

The IMF is now releasing chapters from the April edition of its World Economic Outlook and one of them is quite a nice discussion of the impact of household debt on economic recovery. It's worth reading in full. The chapter begins by explaining that it isn't the housing bust that makes downturns like the Great Recession so nasty, but the fact that the asset price crash occurred after a huge debt boom. A major housing bust with a minor debt stock adds up to...a minor downturn. Add a load of debt, however, and the situation is much nastier. Why does debt matter? The IMF points to three dynamics. One, which I've discussed here before, postulates two kinds of households—savers and borrowers. After a debt bust, borrowers will pull back on spending to repair balance sheets, and interest rates must fall to encourage savers to spend and invest more or the economy will fall into recession. After a large bust, however, the necessary interest rate may be negative, and the difficulty of achieving a negative interest rate may lead to a deep downturn and a weak recovery.

Analysis: Write-Downs Would Benefit Fannie, Freddie (Wall Street Journal)

Mortgage giants Fannie Mae and Freddie Mac could save $1.7 billion by accepting Treasury Department payments to forgive debt for troubled homeowners, but could still face increased costs if doing so causes other borrowers to default, a key regulator said Tuesday. Edward DeMarco, acting director of the Federal Housing Finance Agency, has been studying expanded incentives offered earlier this year by the Obama administration, which wants the mortgage-finance firms to reduce borrowers' loan balances. The two government-controlled companies, which buy up loans and package them for investors, don't currently do so. That offer, made in January, increased pressure on Mr. DeMarco, an independent regulator who has been skeptical of whether such programs make sense. The housing regulator has yet to make a decision on whether to implement a write-down program for Fannie and Freddie.


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Editorials & Opinions

The Volcker Rule Is Fatally Flawed (Peter Wallison in The Wall Street Journal)

Nearly two years ago, in the wake of the financial crisis, Congress passed and President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act. Part of that law, the Volcker Rule—which prohibits banks and their affiliates from engaging in bond trading for their own account—is garnering a lot of attention in Washington these days, none of it positive. Delegations from foreign countries have complained about its effect on sovereign debt. A bipartisan group of senators has recommended a delay in its scheduled implementation this July, and 26 House Democrats signed a letter pointing out that teachers, police officers and private employees' pension funds stand to lose because of the rule. Even Rep. Barney Frank, co-author of the provision, has urged regulators to simplify it. Simplification sounds like a reasonable idea, but it's much easier said than done. The regulation is almost 300 pages and contains over 1,000 separate questions for banks and their associates.

The Austerity Question: ‘How’ Is As Important As ‘How Much’ (Alberto Alesina in voxEU)

The European debate on fiscal austerity has gone astray – focusing exclusively on the size of deficit reductions. What policy makers should really be focusing on is the budget tightening’s composition (tax versus spending) and on the accompanying policies. Indeed, the title of this Vox debate – “Has austerity gone too far?” – reflects this inappropriate emphasis on size. In our view, the essential question is not 'how far' governments go but of 'how' they go far enough. Economists have engaged in some lively debates about how to measure and evaluate the effects of large fiscal adjustments episodes in OECD countries (Europe in particular). But a careful and fair reading of the evidence makes clear a few relatively uncontroversial points, despite the differences in approaches. The accumulated evidence from over 40 years of fiscal adjustments across the OECD speaks loud and clear: First, adjustments achieved through spending cuts are less recessionary than those achieved through tax increases. Second, spending-based consolidations accompanied by the right polices tend to be less recessionary or even have a positive impact on growth.

Shadow Banking Out of the Shadows (Financial Times Editorial)

Lawmakers and regulators deciding how tightly to tie up banks with new regulations are already eyeing a new frontier. Adair Turner, chair of the UK’s Financial Services Authority, and many others warn against the dark side of finance: non-bank companies taking the risks banks used to take. The threats posed by shadow banking are not hard to divine. The sector is rife with sources of instability. Much of the leverage in the US economy grew outside bank balance sheets through securitised loans; networks of derivatives involving non-bank companies amplified systemic risk. As regulators constrain banks’ room for manoeuvre, they must beware of risky behaviour merely migrating to the shadow banking sector where it will be harder to spot. Other threats flow from the connections between the lit and the shadow side of finance. Banks have long relied on shadow banking by, say, borrowing from money market funds through repo markets. Risks that might be acceptable outside the banking system can become systemic by exposing conventional banks to disruption.


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