Monday, May 7, 2012

Economic Events of the Week

Monday – Consumer Credit
Tuesday – NFIB Small Business Optimism Index
Wednesday –
Thursday – Speech by Ben Bernanke at the 48th Annual Conference on Bank Structure and Competition
Friday – Producer Price Index

e21 Reaction & Commentary
e21 Commentary: The Perils of Treasury’s New Talking Points on TARP

Washington Update
House Takes on the Sequester (CQ)
House Budget Markup Previews Spending Fight (National Journal)
The Capital Exception (The Economist)

Market Talk
Who Are the Long-Term Unemployed? (Washington Post)
Yes, the Fed Could Produce a Higher Rate of Inflation (Econbrowser)

Editorials & Opinions
America’s Era of Fiscal Choices (Financial Times Editorial)
Why Has the Recovery in US Employment Been So Slow? (Gary Becker’s Blog)
‘Battle of the Beards’: Paul Krugman vs Ben Bernanke (Paul Samuelson in Washington Post)
There Are A Few Sparks In A Sputtering Economy (Edward Luce in Financial Times)
The Corporate Tax Conundrum (Laura Dyson in Project Syndicate)

e21 Reaction & Commentary

e21 Commentary: The Perils of Treasury’s New Talking Points on TARP

The policy debate regarding the merits of TARP has taken an interesting turn in recent weeks with the Treasury Department’s claim that the program will likely turn a profit.  The bank rescue portion of TARP has already returned a gross profit.  Treasury also points out that when counting Fed seigniorage from printing money to buy interest-bearing assets, the government may even come out ahead when including the cost of the $150+ billion bailout of Fannie Mae and Freddie Mac.  The message is that TARP and the associated rescue programs not only saved the economy from collapse, but were also a shrewd investment undertaken on behalf of taxpayers. It is unfortunate Treasury decided to go down this path.  TARP was a rescue program designed to inject money into firms at rates no private market participant would accept.  TARP not only rescued individual firms, but also helped to stabilize financial markets and arrest the decline in asset prices.  Once market participants were convinced that the government would do whatever was necessary to take the risk of systemic meltdown off the table, asset prices rose swiftly.  In the 40 trading days following the March 6, 2009 lows, the value of the U.S. stock market increased by 36%.  This spike in asset prices increased the fair value of the securities on banks’ balance sheets and the market value of bank equity.  These market gains and those that followed restored the banks’ capital cushions and allowed most of the largest institutions to quickly repay TARP funds.

Washington Update

House Takes on the Sequester (CQ)

House Republicans will take their first concrete steps on Monday to avoid an automatic spending “sequester” early next year and to begin a detailed debate on ways to scale back spending on mandatory programs such as Medicaid and food stamps. “There is an absolute necessity to get our fiscal house in order before greater challenges arise in the country from an economic standpoint,” said Budget Committee member Tom Price, R-Ga. “This is a path that we believe is appropriate to proceed down so that we can get a handle on spending.” The Budget Committee meets at 2 p.m. to mark up two related bills, one of which would stop most of the $109 billion in across-the-board spending cuts that are scheduled to take effect Jan. 2 under the August debt limit law (PL 112-25). The second is a “budget reconciliation” measure that would put in place more than $300 billion in new savings over 10 years to substitute for the sequester.

House Budget Markup Previews Spending Fight (National Journal)

The House Budget Committee this week will offer the latest shot in an increasingly agitated volley over the federal budget, as each party gears up for a nasty spending fight during the lame-duck session. The committee plans to mark up two bills on Monday that would replace scheduled automatic defense cuts with savings wrung from entitlements and nondefense discretionary spending. Despite a deal that is still only eight months old, House Republicans are ignoring the Budget Control Act’s fiscal 2013 topline ($1.047 trillion) and rolling back the long-term deficit measures included in the agreement by trying to void the 10-year automatic cuts, the so-called sequestration that has officials in both parties worried. Republicans are using the reconciliation process, which allows budget bills to be fast-tracked, to find the additional cuts. Echoing the themes that have defined nearly every fight in this Congress, Republicans in the House have cast the reconciliation effort as evidence that they are taking the debt crisis seriously while Democrats dither.

Market Talk

Who Are the Long-Term Unemployed? (Washington Post)

Right now, nearly 30 percent of all unemployed Americans have been out of work for more than a year. All told, that’s 3.9 million workers, slightly more than the number of people who live in Oregon. But who are the long-term unemployed, exactly? The Pew Charitable Trust has a new report out about these Americans, and some of the stats are surprising. For one, long-term unemployment is an equal risk for all unemployed workers, regardless of education level.  A worker with a PhD is less likely to become unemployed in the first place than a worker who never finished high school. But, once those workers lose their jobs, they both have a roughly equal chance of being out of work for more than a year. In fact, an unemployed worker with a PhD is slightly more likely to have trouble finding work again. The Pew report also breaks this down by age. In the current recession, older workers are less likely than younger workers to become unemployed in the first place. But, once an older worker loses his job, he’s far, far more likely to enter the ranks of the long-term unemployed than the younger worker is.

Yes, the Fed Could Produce a Higher Rate of Inflation (Econbrowser)

First, in the current environment, large-scale asset purchases by the Fed are essentially a swap of short-term for long-term government debt. I asked whether those who criticize the Fed for being too timid would also criticize the Treasury for likewise being too timid in keeping so much of its borrowing long term. I answered for them (and on this I did not see any of the Fed's critics dispute my proposed answer) that there were clear fiscal management dangers if the Treasury were to aggressively move the federal debt into extremely short-term securities. I therefore suggested that if we would see some potential danger associated with such a strategy if adopted by the Treasury, then we should also see some danger about such a strategy if adopted by the Fed. Second, the direct stimulative effects of a debt maturity swap were decidedly minor. The conclusion I draw from these two observations is that we might have to push on this lever extremely hard to get anything accomplished, and that pushing on the lever is not without its own dangers. My position is therefore that the Fed is correct in viewing this particular tool as one that should be used with caution.

Editorials & Opinions

America’s Era of Fiscal Choices (Financial Times Editorial)

Neither Obama nor Mitt Romney have done much to enlighten the electorate so far. Their biggest failing is common: neither has credibly specified how they would handle the fiscal reckoning that falls due before the end of the year. Dubbed “taxmaggedon” by some, Congress faces a quartet of choices that will set America’s course for years to come. These include another increase in the sovereign ceiling, the expiration of all the Bush-era tax cuts, a $1,200bn “sequestration” if lawmakers fail to agree on a fiscal plan, and the end of the payroll tax cut and extended benefits for the jobless. A wrong turn on one or more of these could plunge the US back into recession. An intelligent approach, which is asking a lot of Congress nowadays, could restore US growth on to a fiscally sustainable path. Both candidates have failed to offer a realistic account of what should be done.

Why Has the Recovery in US Employment Been So Slow? (Gary Becker’s Blog)

The jobs report from The Bureau of Labor Statistics this past Friday is not good reading. The economy added about 115,000 workers, the slowest increase in 6 months. To make matters worse, over 40% of the unemployed have remained out of work for at least six months. The unemployment rate did drop a notch, but this was because many discouraged workers left the labor force. In fact, the recovery is the slowest in the post World War II period. No single factor explains this slowness, but a combination of several explains most of the slow recovery. Recoveries after major financial crises are notoriously slow. This is well documented in the book This Time is Different: Eight Centuries of Financial Folly, by Carmen Reinhart and Kenneth Rogoff. The authors study many financial crises, and the recoveries from these crises. Recoveries are slow partly because the dire nature of a financial situation is not recognized quickly, and policies that try to end a crisis are usually implemented slowly. While slow recoveries from major financial crises are common, employment would have increased considerably more rapidly, and unemployment would have fallen much faster, were it not for several factors special to this recovery.

‘Battle of the Beards’: Paul Krugman vs Ben Bernanke (Paul Samuelson in Washington Post)

It’s being called the “battle of the beards” — Paul Krugman vs. Ben Bernanke. Both are eminent (and bearded) economists: Bernanke, chairman of the Federal Reserve Board; Krugman, a Nobel Prize winner and a prominent New York Times columnist. Krugman accuses Bernanke of being too timid in fighting high unemployment and slow economic growth. Bernanke calls Krugman’s policy proposals “reckless.” What’s going on? Beyond the rhetoric, there’s a serious debate about the Federal Reserve. A decade ago, the Fed was widely seen as all-knowing and powerful. It could cushion business cycles, defuse financial crises and ensure prosperity. No more. Almost everyone thinks unemployment (8.1 percent in April) is declining too slowly. By year-end 2013, it will still be somewhere between 7 and 8.1 percent, according to top Fed officials’ latest estimates.

There Are A Few Sparks In A Sputtering Economy (Edward Luce in Financial Times)

For the third year in a row, what many anticipated to be a return to robust growth is beginning to look like another summer of hibernation. Last Friday’s payroll numbers showed a 115,000 drop in joblessness, barely enough to match population growth. And the ratio of Americans seeking work continues to go in the wrong direction, which flatters the official unemployment number. It fell a decimal point to 8.1 per cent last month. If no one had dropped out of the labour market, the official rate would have risen. None of this should be much of a surprise. There are plenty of external factors to blame – the crisis in the eurozone, the persistence of relatively high global oil prices and expectations of a slowdown in China and India. To a greater extent than before, the US economy is affected by what happens to demand elsewhere. US domestic spending power is no longer the prime mover in today’s global economy. That era is unlikely to return.

The Corporate Tax Conundrum (Laura Dyson in Project Syndicate)

The United States now has the highest statutory corporate-income tax rate among developed countries. Even after various deductions, credits, and other tax breaks, the effective marginal rate – the rate that corporations pay on new US investments – remains one of the highest in the world. In a world of mobile capital, corporate-tax rates matter, and business decisions about how and where to invest are increasingly sensitive to national differences. America’s relatively high rate encourages US companies to locate their investment, production, and employment in foreign countries, and discourages foreign companies from locating in the US, which means slower growth, fewer jobs, smaller productivity gains, and lower real wages.

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