Subscribe to List View Past Issues RSS translate   facebook facebook Like 0 Comment 0 twitter

 

dashed-line

Tuesday, April 24, 2012

dashed-line
Economic Events of the Week

Tuesday – New Home Sales
Wednesday – Press Conference by Fed Chairman Bernanke, FOMC Meeting Announcement, Durable Goods Orders
Thursday – Jobless Claims
Friday – GDP

dashed-line
Story of the Day
Social Security’s Financial Forecast Gets Darker; Medicare’s Outlook Unchanged (The Washington Post)

Washington Update
Senate Dems Carry Obama’s Water on Bills (Politico)
Fiscal Uncertainty Already Rattling Investors (CQ)
Spinning the Medicare Trustees Report (National Journal)

Market Talk
Sales of New U.S. Homes Probably Climbed in March (Bloomberg)
Banks Join in Bid for Toxic AIG Sale (Financial Times)
Kohn: ‘Huge Risk’ U.S. Won’t Take Steps on Debt, Deficit by Year End (The Wall Street Journal)

Editorials & Opinions
Watch Out! Is the Fed Pushing us Into Another Bubble? (Sheila Bair in CNN Money)
High Tax Rates Won't Slow Growth (Peter Diamond and Emmanuel Saez in The Wall Street Journal)
The Coming US Boom and How Shale Gas Will Fuel It (Philip Verleger in Financial Times)

dashed-line

Story of the Day

Social Security’s Financial Forecast Gets Darker; Medicare’s Outlook Unchanged (The Washington Post)

Surging energy prices and a slower-than-expected economic recovery have worsened the financial outlook for Social Security compared with last year, while the picture for Medicare remains grim but essentially unchanged, according to annual forecasts released by the government Monday. The trustees overseeing Social Security reported that the program’s trust fund will be depleted by 2033 — three years earlier than projected last year. After that, incoming Social Security tax revenue will cover only three-fourths of the benefits scheduled to be paid out through 2086, requiring Congress to either increase taxes or reduce benefits. The fiscal health of Social Security declined even more precipitously according to another, somewhat technical measure. This statistic reflects the difference over the next 75 years between projected benefits and the expected annual income of the American workers whose taxes will finance them. This measure reached its worst level since the early 1980s, when the trust fund’s imminent insolvency prompted Congress to enact a variety of changes.


arrow Back to Top dashed-line

Washington Update

Senate Dems Carry Obama’s Water on Bills (Politico)

When President Barack Obama called for a vote on the “Buffett rule,” Senate Majority Leader Harry Reid scheduled it for Tax Day. As Obama barnstorms college universities, the Senate will vote to keep interest rates from doubling on student loans. And as gender issues bubble up in the presidential campaign, pay equity legislation is waiting in the Senate’s wings. It’s a sharp contrast from much of the past three years, filled with intraparty backbiting as Democrats on Capitol Hill often accused Obama of being detached from legislating, while the White House expressed frustration over a gridlocked Senate. But now Senate Democrats are carrying Obama’s water on key issues the president raises on the campaign trail in a bid to court women, Latinos, young voters and independents who could decide the election. With legislating likely to come to a virtual halt before the election, messaging votes are expected to dominate the House and the Senate agenda. New York Sen. Chuck Schumer, the head of the Senate Democrats’ communications and policy operation, says cooperation between the White House and his caucus has “never been stronger.”

Fiscal Uncertainty Already Rattling Investors (CQ)

The potential for a new round of budget brinkmanship at year’s end is heightening attention in financial circles, where there is growing concern about the uncertainty and economic fallout from the fiscal negotiations expected to follow the Nov. 6 elections. Lawmakers have all but conceded that nothing will be done before the presidential and congressional elections to address changes in the tax code or to make any changes to a sequester process that will lead to $98 billion in automatic spending cuts. The results of the elections will dictate some of the scenarios that could unfold in a lame-duck session. But so will the state of the economy, given that tax receipts and federal spending over the next several months will determine when the Treasury Department reaches its statutory borrowing limit, requiring Congress to raise the debt ceiling. That is expected to happen sometime between the election and the end of the year.

Spinning the Medicare Trustees Report (National Journal)

The Obama administration is trying to turn no news into good news. The Medicare trustees reported on Monday that Medicare's hospital trust fund will start going insolvent in 2024. That's not great news. But last year, when the trustees overseeing the Medicare Trust Fund said the program would go bankrupt in 2024, that was five years sooner than previously forecast.  The administration has been quick to spin this as a success, crediting health care reform with ensuring that the trust fund won’t go broke even sooner than forecast last year. On Monday morning, it put out a report trumpeting about $200 billion in savings it says the law will ensure for Medicare by 2016. Republicans in the House have now twice passed budgets that call for at least a partial privatization of the Medicare program. Health and Human Services Secretary Kathleen Sebelius said Monday’s report shows the administration’s current approach will work better.


arrow Back to Top dashed-line

Market Talk

Sales of New U.S. Homes Probably Climbed in March (Bloomberg)

Sales of new homes probably increased in March for the first time in three months, indicating the market is struggling to stabilize, economists said before a report today. Purchases rose to a 318,000 annual rate, up 1.6 percent from 313,000 in February, according to the median estimate in a Bloomberg News survey of 77 economists. Other reports may show consumer confidence dropped for a second month and home prices decreased at a slower pace. Residential real estate remains a soft spot in the economy, challenged by stricter lending standards and more foreclosures, which depress property values. At the same time, an improved labor market and mortgage rates near historic lows may help prevent the market from slipping further.

Banks Join in Bid for Toxic AIG Sale (Financial Times)

Banks are teaming up to bid on a $7.5bn chunk of the US Federal Reserve’s Maiden Lane III portfolio, after the central bank warned it would not accept “lowball” offers. Citigroup, Credit Suisse and Goldman Sachs have formed a consortium, according to a memo sent to potential investors and seen by the Financial Times. Other banks are believed to be considering forming their own bidding groups for the securities, which involve bundled commercial real estate bonds taken on by the Fed as part of the US government’s 2008 bailout of insurance company AIG. The Fed has previously sold parts of its Maiden Lane II portfolio to single banks, including Credit Suisse and Goldman, but this auction could be the first sold to a consortium. The sale from Maiden Lane III is said to require greater pricing power since it involves two huge collateralised debt obligations, or CDOs.

Kohn: ‘Huge Risk’ U.S. Won’t Take Steps on Debt, Deficit by Year End (The Wall Street Journal)

There is a real danger U.S. authorities won’t take the necessary steps to fix the country’s debt and deficit problems between the elections and the end of this year, former Federal Reserve Board Vice Chairman Donald Kohn said Monday. “What’s required to put the fiscal deficit on a sustainable path are some difficult decisions having to do with entitlement spending and taxes in the United States,” Kohn said at the Europlace forum. “There’s a high degree of uncertainty … there’s a huge risk that they won’t.” Kohn added the U.S. political system has become “soap opera-ized” with such a huge gulf between the country’s political parties there is a real risk debt and deficit will continue to grow past the end of this year. He said governments worldwide must not rely on central bankers to get them off the hook for uncomfortable choices.


arrow Back to Top dashed-line

Editorials & Opinions

Watch Out! Is the Fed Pushing us Into Another Bubble? (Sheila Bair in CNN Money)

In a recent series of college lectures, Ben Bernanke sounded a positive note, extolling the Fed's low-interest-rate policy and predicting sustainable economic growth. I want to believe him, but his words echo the confidence exuded by the Fed in late 2006 when it missed the housing bubble. Is it missing the bond bubble now? The Fed has maintained interest rates at or near zero for four years running, even though the financial system has been relatively stable since 2009. The Fed's actions have kept Treasury bond prices high (while keeping the government's interest costs low), but the fundamentals do not support the high valuations, given the fiscal mess we are in. Sooner or later, the bond bubble will burst. History has shown that a structurally weak economy combined with a fiscally irresponsible government propped up by accommodative central-bank lending always ends badly. Absent a change in policies, a toxic brew of volatile interest rates and uncontrollable inflation could define our future.

High Tax Rates Won't Slow Growth (Peter Diamond and Emmanuel Saez in The Wall Street Journal)

The share of pre-tax income accruing to the top 1% of earners in the U.S. has more than doubled to about 20% in 2010 from less than 10% in the 1970s. At the same time, the average federal income tax rate on top earners has declined significantly. Given the large current and projected deficits, should the top 1% be taxed more? Because U.S. income concentration is now so high, the potential tax revenue at stake is large. But will taxable incomes of the top 1% respond to a tax increase by declining so much that revenue rises very little or even drops? In other words, are we already near or beyond the peak of the famous Laffer Curve, the revenue-maximizing tax rate? The Laffer Curve is used to illustrate the concept of taxable income "elasticity,"—i.e., that taxable income will change in response to a change in the rate of taxation. Top earners can, of course, move taxable income between years to subject them to lower tax rates, for example, by changing the timing of charitable donations and realized capital gains. And some can convert earned income into capital gains, and avoid higher taxes in other ways. But existing studies do not show much change in actual work being done.

The Coming US Boom and How Shale Gas Will Fuel It (Philip Verleger in Financial Times)

Long-term forecasts in early 1991 predicted slowing US growth by 2000. The Council of Economic Advisers warned, for example, that growth would drop below 3 per cent a year by the end of 1999 due to a slowing economy. The forecasts were wrong. Ten years later, the CEA celebrated a prolonged period of unexpectedly robust growth. The Council and Alan Greenspan, then chairman of the Federal Reserve, attributed the unexpected expansion to strong productivity growth promoted by widespread integration of computers in the workplace. For seven of the nine previous years, growth exceeded 3 per cent, and for the past four years, it exceeded 4 per cent. Productivity gains from computers boosted growth by more than 1 per cent a year from the levels expected in 1991. Ten years from today, the CEA and Federal Reserve chairman will again celebrate a decade of unexpected strong growth. This time the credit will go to countrywide gains from the very low energy prices found only in the US. Low-cost energy will have spawned an export surge in all sorts of goods, from chemicals to tyres. Fracking and the other technologies that gave us low natural gas prices will have added more than 1 per cent a year to US growth, repeating the 2000 surprise.


arrow Back to Top dashed-line

solid-line

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.

solid-line_1px

2011, e21: Economic Policies for the 21st Century


1150 17th Street, NW - Suite 504 - Washington, DC 20036
Phone: 202-232-0090 | Email: info@economics21.org

52 Vanderbilt Avenue - New York, New York 10017
Phone: 646-673-8539 | Email: info@economics21.org