Wednesday, June 20, 2012

Economic Events of the Week

Wednesday – FOMC Announcement and Forecast, Bernanke Press Conference
Thursday – Jobless Claims, Existing Home Survey, Philadelphia Fed Survey
Friday –

Story of the Day
Why Not Enact an ‘Intelligent’ National Infrastructure Plan? (Christopher Papagianis in Reuters)

Washington Update
Top Lawmakers Try to Save Highway Bill (Politico)
Mitch McConnell: Start Over on Health Care (Politico)
Despite Approaching Deadline, Congress Makes Little Progress on Student Loans (CQ)
House Dem: Ruling Striking Mandate Won’t be a ‘Show-Stopper’ for Health Law (The Hill)

Market Talk
Europe, Weak Economy Add to Pressure on Fed (The Wall Street Journal)
Fed Born Of Morgan’s Bailout Scrutinized After Dimon’s Loss (Bloomberg)
Housing Starts at 708 Thousand in May, Single Family Starts Increase to 516 Thousand (Calculated Risk Blog)

Editorials & Opinions
The GDP Impact a U.S. Fiscal Consolidation Strategy (John Taylor Blog)
Europe in 1931 (James Hamilton in Econbrowser)
Washington Should Lock In Low Rates (Todd Buchholz in The Wall Street Journal)

Story of the Day

Why Not Enact an ‘Intelligent’ National Infrastructure Plan? (Christopher Papagianis in Reuters)

There are about 1 billion cars on the world’s roads today. By mid-century, forecasts have that number climbing to 4 billion. Meanwhile, Congress is mired in a debate over whether to pass a new highway bill. Senator Barbara Boxer, a chief negotiator of the pending bill, lamented recently that she was “embarrassed for the people of this country” that this measure had not been enacted. After all, she said, passing highway bills used to be as popular and as important as “motherhood and apple pie.” As with all previous highway bills, proponents generally wrap their arguments in projections for new jobs, or rhetoric that links fresh infrastructure spending to unclogging the arteries of commerce. For the president, a highway bill fits his campaign theme of getting America back to work. In a recent speech in Cleveland, the president issued a call to “rebuild America” and to do “some nation-building here at home.” The main obstacle remains how to pay for new spending and investment. Flashback to 1998 and 2005: Those were the last years Washington enacted “highway bills,” or measures to reauthorize federal infrastructure spending programs. Now that the economy is sputtering in 2012, many would like to see Congress pull a page from the playbooks of those years. The taxpayer price tags for the ’98 and ’05 multiyear highway bills were $218 billion and $286 billion, respectively. Count President Obama as part of today’s infrastructure-stimulus choir, as he has proposed a $556 billion six-year bill.

Washington Update

Top Lawmakers Try to Save Highway Bill (Politico)

Top congressional leaders will meet Tuesday afternoon to decide the fate of the long-stalled transportation bill. Speaker John Boehner, Senate Majority Leader Harry Reid, House Transportation Chairman John Mica and Sen. Barbara Boxer will huddle Tuesday afternoon to discuss how to break an impasse on negotiations that threaten the nation’s highway funding. Federal highway funding runs dry at the end of June and the House is only in session for seven legislative days before then. Transportation policy has operated on a series of nine stopgap extensions for nearly 1,000 days, and the last long-term transportation bill was enacted in 2005. The leadership meeting reflects a new sense of urgency in the conference committee negotiations, but it’s not clear whether the lawmakers will come up with a short-term Band-Aid for highway funding or finish negotiations on a longer-term bill that’s become stalled in a House-Senate battle. The full 47-member conference committee has only met once, though smaller informal meetings and marathon staff discussions have continued during the past month and a half.

Mitch McConnell: Start Over on Health Care (Politico)

Senate Minority Leader Mitch McConnell (R-Ky.) on Tuesday savaged the president’s health care reform plans, now before the Supreme Court, as the “single biggest step in the direction of Europeanizing America” and accused Democrats of living “every day to raise taxes.” “We need to start over. It was a huge, huge mistake, the single biggest step in the direction of Europeanizing America,” said McConnell on CBS’s “This Morning.” “I hope the court strikes the whole thing down. Whether they find it unconstitutional or not it’s still a big mistake. We just need to start over and try to get it fixed,” he added. McConnell also said that he was willing to sit down with President Barack Obama to reach a “grand bargain” on debt and entitlement reform.

Despite Approaching Deadline, Congress Makes Little Progress on Student Loans (CQ)

It’s been nearly two weeks since lawmakers last focused serious attention on finding a way to prevent the student loan interest rate from doubling on July 1. But Senate Majority Leader Harry Reid and House Speaker John A. Boehner didn’t even bring up the subject when they met late Tuesday afternoon. Although the official subject of the meeting between Reid, D-Nev., and Boehner, R-Ohio, was the surface transportation bill, there was some expectation that the two top leaders would also discuss the pending student loan legislation, given the quickly-approaching deadline. But Reid said afterward that the issue didn’t come up.Likewise, Senate Minority Leader Mitch McConnell, R-Ky., also confirmed Tuesday, “I’m not aware of any discussions going on” regarding student loans. Since Reid proposed two new ways to cover the $5.9 billion cost of extending the current 3.4 percent interest rate on federally subsidized undergraduate loans for one year, there has been no movement, raising doubts that Congress will be able to avert a scheduled doubling of the interest rate on July 1 for the 7 million students expected to take out loans for the upcoming school year.

House Dem: Ruling Striking Mandate Won’t be a ‘Show-Stopper’ for Health Law (The Hill)

A leading House Democrat said Tuesday that if the Supreme Court strikes down the individual mandate, it will not be "a show-stopper" for the healthcare law. Rep. Jan Schakowsky (Ill.), the chief deputy whip for House Democrats, predicted during an interview on The Bill Press Show that the entire law would be upheld but said her party "would absolutely move forward" with the remaining reforms even if the mandate is defeated. "There are other ways to skin the cat — to make sure that people do join and get insurance," she added. "So I don't think [a ruling against the mandate] would be a complete show-stopper." Her statement comes as both parties position themselves ahead of the landmark decision, which is expected in the next two weeks. Some court watchers anticipate that the justices will strike the individual mandate to purchase health insurance while upholding other provisions in the law.

Market Talk

Europe, Weak Economy Add to Pressure on Fed (The Wall Street Journal)

Federal Reserve policy makers, meeting amid growing concerns about the U.S. recovery and the European debt crisis, have an array of options if they decide the economy needs an added boost. Fed officials, concluding a two-day policy meeting Wednesday, could extend a program known as "Operation Twist," in which the central bank sells short-term Treasury bills and notes and plows the proceeds into longer-term securities. They also could decide to shift the proceeds into mortgage- backed securities rather than long-term Treasury bonds. Among other choices: launching a new round of bond-buying, known to some as quantitative easing, to expand the central bank's portfolio of assets. Or they could alter the way they describe their plans for interest rates with an assurance that short-term interest rates will stay near zero beyond 2014. Policy makers also could stand pat but offer assurance that they stand ready to act if the economy gets weaker.

Fed Born Of Morgan’s Bailout Scrutinized After Dimon’s Loss (Bloomberg)

After John Pierpont Morgan stepped in to quell the panic of 1907, U.S. lawmakers created the Federal Reserve in 1913 as a lender of last resort to defend against future financial crises. Almost a century later, the disclosure of a $2 billion trading loss by the man who now heads the Morgan banking empire, Jamie Dimon, has prompted calls to end an arrangement that Vermont Senator Bernie Sanders calls “a clear example of the fox guarding the hen house.” The bill signed by President Woodrow Wilson created a decentralized institution with a Washington-based Federal Reserve Board and 12 regional banks. Each has its own president and board that includes representatives from the banking industry. Dimon, chief executive officer ofJPMorgan Chase & Co. (JPM), has served since 2007 as a director of the Federal Reserve Bank of New York, the entity that oversees Wall Street banks including Dimon’s, the largest U.S. lender. “The optics in a situation like this are not good,” said Alfred Broaddus, former president of the Richmond Fed. “Maybe it is fair now to take a look at this structure and see whether it still makes sense.”

Housing Starts at 708 Thousand in May, Single Family Starts Increase to 516 Thousand (Calculated Risk Blog)

From the Census Bureau: Permits, Starts and Completions:  “Housing Starts: Privately-owned housing starts in May were at a seasonally adjusted annual rate of 708,000. This is 4.8 percent below the revised April estimate of 744,000, but is 28.5 percent above the May 2011 rate of 551,000. Single-family housing starts in May were at a rate of 516,000; this is 3.2 percent above the revised April figure of 500,000. The May rate for units in buildings with five units or more was 179,000. Building Permits: Privately-owned housing units authorized by building permits in May were at a seasonally adjusted annual rate of 780,000. This is 7.9 percent above the revised April rate of 723,000 and is 25.0 percent above the May 2011 estimate of 624,000. Single-family authorizations in May were at a rate of 494,000; this is 4.0 percent above the revised April figure of 475,000. Authorizations of units in buildings with five units or more were at a rate of 266,000 in May.”

Editorials & Opinions

The GDP Impact a U.S. Fiscal Consolidation Strategy (John Taylor Blog)

Three and half years ago, in February 2009, John Cogan, Volker Wieland, Tobias Cwik and I estimated what the impact of the 2009 stimulus package (ARRA) would be. Our estimates, obtained by simulating modern macroeconomic models, were much smaller than those of the Administration. Since then our estimates have been verified in research by a group of economists at central banks and international financial institutions who found that our simulations were in mid-range of their models. Now, Wieland, Cogan and I, joined by Maik Wolters, are simulating modern macroeconomic models to evaluate a fiscal consolidation strategy to reduce the deficit and end the explosion of the debt. We are using two models which incorporate forward looking behavior, one with price and wage rigidities and one with more classical features. We have examined a gradual, credible strategy to reduce federal spending as a share of GDP—relative to current policy as assumed in the CBO alternative fiscal scenario baseline and starting in the first quarter of 2013.

Europe in 1931 (James Hamilton in Econbrowser)

I was at a conference at the Cato Institute two weeks ago discussing some research by Dartmouth Professor Doug Irwin on the role of the gold standard in the Great Depression of 1929-1933. If you're interested, you can see a written version of my comments, the slides from my presentation, or a video of the session (my comments begin a little more than half way in). Here I'd like to relate some of the discussion of what happened in Europe in 1931, and comment on some of the parallels with what is going on today. Some people think of the Great Depression as beginning or even caused by a stock market crash in October 1929. But Robert Shiller's data indicate a broad market decline that month of 26%, not a whole lot worse than the 20% decline we saw in September 2008. From September 1929 to March 1931, the total stock market decline was 44%, which was milder than the 49% decline from September 2007 to March 2009. The Federal Reserve Board's index of industrial production fell 28% from September 1929 to March 1931, somewhat more severe than the 17% drop recorded in the most recent recession. But if the U.S. economy had turned around in early 1931, we would be talking about that period as just another bad recession. The reason we instead call it the Great Depression is that the stock market went on to fall an additional 61% and industrial production an additional 27% from the levels of March of 1931.

Washington Should Lock In Low Rates (Todd Buchholz in The Wall Street Journal)

America has long been the land of the game show. And at some point just about all of us have screamed at a contestant: "Don't be stupid—take the money!" That's what American citizens should be screaming at the United States Treasury today. The government has racked up $5 trillion of debt since President Obama moved into the White House. We don't know how we're going to pay it back. Yet the world is willing to lend us 10-year money at rates substantially below 2%. So why not give our kids a break by issuing 50- or 100-year bonds, locking in today's puny rates? Corporations do it. In 1993, Disney issued $300 million in "Sleeping Beauty" bonds, and the market scooped them up. Last year, Norfolk Southern sold $400 million in 100-year bonds despite the obvious uncertainty: Will railroads be spaceships in 100 years? Other governments are issuing long-term bonds, too. In 2011, buyers grabbed Mexico's 100-year bonds, despite that country's pockmarked history of devaluations and defaults. The average maturity of U.K. debt is three times longer than ours.

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