Friday, April 27, 2012

Economic Events of the Week

Friday – GDP

Story of the Day
Falling Labor Force Participation (Timothy Taylor’s Blog)

Washington Update
Freeing Boomers from Social Security Cuts Blows Up Math (Bloomberg)
GOP’s Student-Loan Pivot Opens Dialogue (National Journal)
Cantor’s Legislative Strategy Draws Notice (CQ)

Market Talk
Housing Markets (Free Exchange)
Weekly Initial Unemployment Claims at 388,000 (Calculated Risk)

Editorials & Opinions
Time for a Serious Review of Tax Extenders (Howard Gleckman in TaxVox)
Ben Bernanke vs Paul Krugman (Ezra Klein in Washington Post)
Romney’s Fiscal Fantasy Plan (Lawrence Summers in Washington Post)
The Potential of NGDP Targeting (Macro Matters)

Story of the Day

Falling Labor Force Participation (Timothy Taylor’s Blog)

Taken together, the evidence indicates that long-term trend factors account for  about half of the decline in labor force participation from 2007 to 2011, with cyclical factors accounting for the other half. What are these long-term trend factors? 1) The baby boom generation pushed up the labor force participation rate while they were moving through their prime earning years, and now are starting to pull down the labor force participation rate as they head into retirement. 2) Women entered the (paid) labor force in large numbers starting after World War II, which helped drive the overall labor force participation rate higher for decades. But the labor force participation rate for women seemed to top out at around 60%, and has flattened out since then. 3) Young adults in the 16-24 age group have become less likely to work. This group had a labor force participation rate of nearly 70% back in the 1970s and 1980s, but it has now fallen to about 55%.

Washington Update

Freeing Boomers from Social Security Cuts Blows Up Math (Bloomberg)

Young people may be the biggest casualties of the U.S. Congress’s unwillingness to fix Social Security. Retiring Baby Boomers are swelling the program’s rolls, with 10,000 turning 65 every day, according to the Pew Research Center. By 2035, there will be only two workers paying taxes to finance benefits for every retiree. While lawmakers have no solution, they generally agree they can’t make significant cuts for those in or near retirement. The longer Congress waits to act, the more people will be shielded -- and the more heavily cuts will fall on younger Americans. The result could be a two-tiered system raising questions about generational fairness, said Andrew Biggs, former deputy commissioner of the Social Security Administration. “It’s like a seesaw -- if one side is up, the other side has to be down,” he said. “Nobody wants to do the actual things you have to do so you don’t screw your kids on this stuff.” The Social Security benefits math is an illustration of the price of failing to address the long-anticipated retirement of the Baby Boom generation.

GOP’s Student-Loan Pivot Opens Dialogue (National Journal)

One week ago, Republican lawmakers showed almost no interest in the student-loan interest-rate hike looming this summer, even though Democrats and student groups had been pestering them to do something about it for months. All that changed this week. On Friday, House Republicans will rally around legislation that will freeze for one year the current 3.4 percent interest rate for subsidized student loans. If Congress doesn’t act by June 30, that rate will double. The deadline is the result of Democrat-pushed legislation in 2007 that set the interest rate at 3.4 percent for five years—a motion that Republicans protested at the time. Republicans offer two arguments to justify their about-face. First, they say the rate extension, offered up on Wednesday by House Speaker John Boehner, won’t be shouldered by taxpayers; instead, it will be paid for from the health care law’s chronic-disease prevention fund, which most of them don’t like anyway. Second, even though they didn’t invite the attention President Obama has drawn to the issue, the publicity gives them a year to talk up a different solution that is “market-based.” These are both solid conservative ideas that should sell easily with constituents and rank-and-file members.

Cantor’s Legislative Strategy Draws Notice (CQ)

Majority Leader Eric Cantor’s recent push to bolster the House GOP’s election year legislative resume is drawing mixed reviews. Some rank-and-file Republicans acknowledge that the bills Cantor has drafted and managed have not been landmark legislation. But they appreciate a chance to show that the House can do things without triggering bitter partisan standoffs. While President Obama recently signed one of Cantor’s bills into law, Democratic lawmakers and aides dismiss the majority leader’s agenda as a collection of minor bills and low-hanging fruit. It is common for a majority leader to determine the timing and general scope of legislation, but the No. 2 Republican in the House has expanded his role to include shaping bills and serving as their chief sponsor.

Market Talk

Housing Markets (Free Exchange)

I would like the Fed to do more to secure the American recovery. I'm nervous about a few recent blips in the data, like today's initial jobless claims number, which continued a jarring trend toward 400,000. If I'm less worried about the fragility of the American economy than I used to be however, housing has a lot to do with it. Consider just a few recent data points: The apartment market strengthened for the fifth consecutive quarter during the first three months of 2012. March pending home sales beat expectations. Home prices rose from February to March, according to Zillow. Home prices rose in February, according to the FHFA. Delinquencies declined in March. New home inventory is at record low levels. From January to February, seasonally-adjusted home prices rose, according to Case-Shiller. My assumption has been that a real bottom in prices will greatly reduce the incidence of default and should accordingly lead banks to relax lending standards (which are currently at unreasonably tight levels). That, in turn, should flip the housing market equilibrium to one of price stability, construction, employment growth, and new household formation.

Weekly Initial Unemployment Claims at 388,000 (Calculated Risk)

The DOL reports: “In the week ending April 21, the advance figure for seasonally adjusted initial claims was 388,000, a decrease of 1,000 from the previous week's revised figure of 389,000. The 4-week moving average was 381,750, an increase of 6,250 from the previous week's revised average of 375,500.” After falling to 363,000 at the end of March, the 4-week average has increased for three straight weeks and is at the highest level this year.

Editorials & Opinions

Time for a Serious Review of Tax Extenders (Howard Gleckman in TaxVox)

A House panel today began what could be the beginning of a remarkable exercise: It is reviewing the merits of dozens of expiring tax provisions that litter the Revenue Code. I hesitate to say so, but this could be a case of Congress doing its actual job. By the Joint Committee on Taxation’s count, 75 of these tax extenders have already expired this year or will do so before New Year’s Day. That doesn’t include tax breaks related to the Transportation Trust Fund or federal disaster relief. It is quite a collection: Subsidies for both oil and gas and alternative fuels, enhanced charitable contributions for computers, the infamous NASCAR race track give-away, and special tax breaks for movie and TV producers, mining companies, railroads, rum, and investment companies to name only a few. And, of course, the Research and Experimentation Tax Credit that has taken on mythical status in Washington yet seems to do little or nothing to enhance research.

Ben Bernanke vs Paul Krugman (Ezra Klein in Washington Post)

I spent my first year at The Washington Post sitting about 10 feet away from Binyamin Appelbaum. It was a great learning experience. Appelbaum, who is now at the New York Times, doesn’t ask questions so much as he springs traps. And he sprung one on Federal Reserve Chairman Ben Bernanke at a press conference on Wednesday: “Unemployment is too high, and you said you expect it to remain too high for years to come. Inflation is under control, and you say that you expect it to remain under control. You say that you have additional tools available for you to use, but you’re not using them right now. Under these circumstances, it’s really hard for a lot of people to understand why you are not using those tools right now. Could you address that? And specifically, could you address whether your current views are inconsistent with the views on that subject that you held as an academic?” That last line was a reference to a New York Times Magazine article by Paul Krugman exploring “The Bernanke Conundrum — the divergence between what Professor Bernanke advocated and what Chairman Bernanke has actually done.” Bernanke’s response to Appelbaum was perhaps his clearest statement on why Bernanke, and the Federal Reserve, aren’t doing more. It’s worth reading at length.

Romney’s Fiscal Fantasy Plan (Lawrence Summers in Washington Post)

Political arithmetic is always suspect, and one should always examine carefully the claims of those seeking votes. Smart observers have learned to distinguish between the claims of political candidates and their advisers and proposals that have been evaluated by independent scorekeepers such as the Congressional Budget Office (CBO). This principle was aptly illustrated by the “budget analysis” Mitt Romney’s chief economic adviser, Glenn Hubbard, recently put forward. In a Wall Street Journal op-ed this week, Hubbard constructs a budget plan that he imagines President Obama might propose someday, engages in a set of his own extrapolations and then makes assertions about it. He does not discuss the actual Obama plan or how it has been evaluated by the CBO. Nor does Hubbard invest his credibility in defending the claims that Romney has made about his own fiscal plans. He simply states that “Yes, President Obama and Mitt Romney have budgets with competing visions. But Gov. Romney’s budget makes tough choices” — without delving into the specifics or trade-offs that Romney’s “tough choices” entail.

The Potential of NGDP Targeting (Macro Matters)

One argument that I often hear against the adoption of an NGDP targeting regime as opposed to an inflation targeting regime is that we either don’t know what real potential GDP growth is with a reasonable degree of accuracy, or that it shifts around so frequently that adopting an NGDP level target along an x% growth path may be appropriate at one point in time, but may then turn out to be inappropriate given ex-post corrections to measured potential GDP growth or shifts in the potential growth rate of the economy. These two concerns however, actually make NGDP level targeting a more appropriate regime.

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