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Tuesday, April 17, 2012

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Economic Events of the Week

Tuesday – Housing Starts
Wednesday – President Obama Delivers Remarks on the Economy in Columbus, OH
Thursday – Existing Home Sales
Friday – e21/SOMC Spring Symposium featuring Rep. Kevin Brady

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e21 Reaction & Commentary
e21 Commentary: CBO Confirms It: Obamacare Creates An Unstable Disequilibrium in Insurance Subsidies (Jim Capretta)
e21 Commentary: ObamaCare & The Meaning of Insurance

Washington Update
Senate Kills 'Buffett Rule' (Politico)
Conrad Aims for Deficit Reduction (CQ)
Big Tax Code Changes Are a Tough Sell (National Journal)
Businesses Split on Corporate Tax Reform (National Journal)

Market Talk
Fed Priority of Rates Integrity Prompts Outlook Struggle (Bloomberg)
SEC Addressing Gaps in Analysis (The Wall Street Journal)
New Model Validation of Stimulus Impacts (Economics One)

Editorials & Opinions
Banks Don't Need to Gamble With Taxpayer Money (Roger Vasey in The Wall Street Journal)
The White House Argument (David Brooks in The New York Times)

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e21 Reaction & Commentary

e21 Commentary: CBO Confirms It: Obamacare Creates An Unstable Disequilibrium in Insurance Subsidies (Jim Capretta)

In March, the Congressional Budget Office (CBO) released a new studyon employee migration out of job-based plans and into ObamaCare’s state exchanges. The effect of ObamaCare on employer-based insurance has been a hotly debated topic ever since the law was enacted in March 2010. Several independent analysts predict that “dumping” into the exchanges will occur at a much higher rate than CBO assumed in its original estimates of ObamaCare and have argued that the result would be much higher federal costs than CBO estimated. Perhaps not surprisingly, CBO used the release of its most recent assessment of the law’s impact on insurance arrangements to defend its original cost estimates and again argue that the law will, on a net basis, reduce future budget deficits. CBO’s latest estimates indicate that 3 to 5 million fewer workers will be in job-based insurance plans in 2019 to 2022 due to Obamacare’s incentives — a relatively small number compared to the nearly 160 million Americans who are expected to get their coverage from their place of work in the coming years. Moreover, CBO suggests that, even if migration out of employer plans is higher than what the agency is currently projecting, it won’t add much to the federal budget deficit because taxes would rise almost enough to fully offset any spending increase. Most news accounts dutifully reported these finding from CBO as the primary takeaways of the study.

e21 Commentary: ObamaCare & The Meaning of Insurance

The key question surrounding the constitutionality of the Affordable Care Act (a.k.a. ObamaCare) is whether the federal government can compel citizens to purchase health insurance. Absent the mandate, ObamaCare will not function as intended because the program’s coverage guarantee and expansion is financed, in part, through cross-subsidies generated by mandating that individuals purchase insurance policies that cost several times more than their expected insurance claims. Defenders of ObamaCare rationalize these compulsory transfers as inherent to “insurance,” which they erroneously present as a system where low-risk policyholders are expected to overpay for their coverage to reduce the cost of the policies for those with predictably high claims... The mandate may be necessary to effectuate the cross-subsidies at the heart of Obamacare, but these cross-subsidies are not an essential feature of insurance. Perhaps it is not surprising for “insurance” to be so misused by Obamacare’s defenders, as the insurance policies required under the program could scarcely be classified as “insurance” in the first place. The mandated coverage of routine expenses like birth control is fundamentally different from insurance’s role as financial protection from extreme loss.


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Washington Update

Senate Kills 'Buffett Rule' (Politico)

The Senate on Monday rejected the so-called “Buffett Rule” on a largely partisan roll call that was more of an election year show vote than a substantive debate on tax policy. The procedural vote was 51-45, falling short of the 60 votes needed to break a filibuster. The Buffett Rule — named after mega-investor Warren Buffett, who famously disclosed that he was paying a lower tax rate than his secretary – was designed to ensure that millionaires don’t skirt the higher tax rates often paid by the middle class. President Barack Obama has repeatedly called for millionaires to pay a higher tax rate, but the Buffett Rule never actually had a chance of passing the Senate or even coming to the floor of the GOP-controlled House. And it doesn’t do much to significantly reduce the deficit nor noticeably jolt the recovering economy. Still, the Buffett Rule makes for a populist election year talking point for Democrats.

Conrad Aims for Deficit Reduction (CQ)

Senate Budget Chairman Kent Conrad will include a long-term deficit reduction plan he hopes can draw support from both parties later in the year as part of a budget resolution to be marked up this week. “What we need now . . . is a long-term plan,” the North Dakota Democrat said Monday after a closed-door meeting with Democratic members of the committee. “We’re still locking down details.” Conrad, who is moving ahead with his plan despite Senate Majority Leader Harry Reid’s stated insistence that he will not bring a budget resolution to the floor, scheduled a news conference Tuesday afternoon to release his fiscal 2013 plan. The committee is set to mark up the tax and spending blueprint in two sessions, Wednesday and Thursday. Although Conrad provided little information, the proposal is likely to be what he will call a “balanced” plan that pairs increased revenue with spending cuts to lower deficits and shrink the debt as a share of the economy. It might borrow heavily from deficit reduction proposals Conrad helped write when he served on the president’s fiscal commission in 2010 and as a member of the Senate’s bipartisan Gang of Six last year. Those plans aimed to reduce the deficit by about $4 trillion over a decade.

Big Tax Code Changes Are a Tough Sell (National Journal)

How much flexibility House Ways and Means Committee Chairman Dave Camp, R-Mich., really has to revamp the tax code has little to do with whether GOP leaders will let him off the leash or whether he’s a big enough force to bend others to his will— and everything to do with how Congress now operates. The chairmanship is no longer a perch from which to take a thoughtful, broad, long-ranging outlook; now it’s one with a nearsighted view of short-term problems, deadlines, and partisan fighting. For Camp, that dilemma hit home quickly; on taking up the gavel last year, he ran head-on into the debt-ceiling showdown and the repercussions of the Budget Control Act. “Of course, the tax laws themselves have been in the front seat driving the discussions,” said Pete Sepp of the National Taxpayers Union. “Congress keeps putting the laws on such a short timetable. It’s a difficult cycle to break out of.” Past chairmen, such as former Rep. Bill Archer, R-Texas, who instituted significant tax reforms and restructuring during his six-year reign, had much more room to operate, Sepp said. “Just about any chairman in the Ways and Means slot right now would have difficulty charting an independent and strong course,” he said.

Businesses Split on Corporate Tax Reform (National Journal)

Everyone in Washington is all for tax reform, until the conversation turns to specifics. That is especially true when it comes to the deeply divided business community.Behind the fortified big-business front line in the march toward corporate tax reform, a lobbying fight pitting multinational corporations against domestic giants is already underway.Two powerful, high-spending campaigns are driving the discussion. The RATE Coalition represents domestic behemoths such as FedEx, Ford Motor, and the National Retail Federation, which have a single-minded goal of lowering the corporate rate. On the other side, the Win America Campaign speaks for multinational, pharmaceutical, and technology giants—Apple, Microsoft, and Pfizer, for example—that want to maximize the global system’s benefits.The domestic giants have a clear goal: lowering the corporate tax rate across the board by broadening the tax base. These companies largely cannot take advantage of loopholes that allow firms to move capital back and forth across the globe or access the incentives that encourage multinationals to invest at home. Yet these companies hire a lot of American employees and produce a lot of the goods Americans consume, said Jim Pinkerton, co-chairman of the RATE Coalition.


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Market Talk

Fed Priority of Rates Integrity Prompts Outlook Struggle (Bloomberg)

Federal Reserve officials are grappling with how they might eventually exit from their plan to keep interest rates low through late 2014 without jolting markets.Policy makers have relied on communications about their rate expectations to provide additional stimulus after cutting their benchmark rate to near zero in December 2008. Now, they’re seeking to link their commitment more closely to changes in the economic outlook. Giving investors more information about the threshold for a shift would make it easier to change policy, said Ethan Harris, co-head of global economics research at Bank of America Merrill Lynch.“When you present scenarios, you’re showing the public that you will react; or in other words, if inflation becomes a problem, you will hike rates earlier,” Harris said. “If you guide the markets in advance and explain to them the reaction function, then they’ll kind of do your job for you,” so policy makers won’t “have to actually hike to convince the markets that they’re hiking.”

SEC Addressing Gaps in Analysis (The Wall Street Journal)

The Securities and Exchange Commission is moving to address criticism that it doesn't adequately weigh the economic impact of its regulations, a problem that has led to rules overturned in the courts and delays of key policies. When writing rules on everything from financial derivative contracts to the payments energy companies make to foreign governments, the U.S. regulator is required to consider the impact on efficiency, competition and capital markets. A federal court last year struck down an SEC regulation that would allow shareholders more easily to oust corporate directors, saying the commission acted "arbitrarily and capriciously" and without a proper economic analysis. Last year's ruling marked the fourth time courts have blocked an SEC rule in frequent years. Opponents of coming rules mandated by the Dodd-Frank financial overhaul law have seized on the ruling to warn that the SEC may not be adequately looking at economic benefits and costs.

New Model Validation of Stimulus Impacts (Economics One)

A paper just published in the American Economic Journal: Macroeconomics sheds additional light on the Keynesian multiplier debate, which has surged since the 2009 stimulus package—ARRA—was enacted. In January 2009 Christina Romer and Jared Bernstein released a widely-cited paper showing that the multiplier for ARRA would be quite large. In February 2009, John Cogan, Tobias Cwik, Volcker Wieland and I (CCTW) released a paper showing that more modern “New Keynesian” models implied a much smaller multiplier. Since then many papers have been written including a paper by Christiano, Eichenbaum and Rebelo which found larger multipliers in the Christiano, Eichenbaum, and Evans (CEE) New Keynesian model. The debate has focused on the size of the government purchases multiplier.The new paper, Effects of Fiscal Stimulus in Structural Models, is written by 17 authors from central banks and international institutions around the world (Guenter Coenen, Chris Erceg, Charles Freedman, Davide Furceri, Michael Kumhof, René Lalonde, Douglas Laxton, Jesper Lindé, Annabelle Mourougane, Dirk Muir, Susanna Mursula, Carlos de Resende, John Roberts, Werner Roeger, Stephen Snudden, Mathias Trabandt, and Jan in’t Veld). As part of the research reported in the paper the authors compare the CCTW and the CEE estimates of ARRA with four estimated "New Keynesian" structural models of the kind used in practice by policymakers and their staffs.


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Editorials & Opinions

Banks Don't Need to Gamble With Taxpayer Money (Roger Vasey in The Wall Street Journal)

The Volcker Rule—part of the Dodd-Frank financial reform law—is necessary to correct a mistake that poses a danger to our economy.The mistake was the repeal of the Glass-Steagall Act in 1999. Commercial banks have since been able to trade a wide variety of inherently risky securities with huge amounts of government-insured deposits. If the investments failed, taxpayers would have to swallow the losses. Glass-Steagall, enacted in the depths of the Great Depression, had insured bank deposits but prohibited banks from using these deposits for securities trading, and for good reason.The Volcker Rule is intended to correct this mistake by constraining banks with explicit or even implied taxpayer support from proprietary trading. Those opposed to the Volcker Rule have a long list of objections. Prohibiting banks from proprietary trading will create illiquidity in bond markets. It will hinder banks' ability to serve clients and foreign banks. It will impose costs on banks and slow the economy.

The White House Argument (David Brooks in The New York Times)

I’ve been critical of President Obama’s budgets. I’ve argued that while I like the way Obama preserves spending on things like scientific research and programs for the vulnerable, he doesn’t do enough to avoid a debt crisis. I’ve based that argument on certain facts. President Obama’s 2013 budget will add roughly $6 trillion to the nation’s debt over the next 10 years. By 2022, Americans will be spending $915 billion on interest payments on the debt alone, a number far larger than that year’s entire defense budget.If you look further out, the situation is worse. According to the Committee for a Responsible Federal Budget, by 2050, Representative Paul Ryan’s budget would cut total public debt to 10 percent of G.D.P. Current law would put debt at 42 percent of G.D.P. Under the Obama budget, debt would skyrocket to 124 percent of G.D.P.


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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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